Price-Earnings Ratio

Price-Earnings Ratio

Laxmikanth Work:

The Price Earnings Ratio (P/E Ratio) is the relationship between a company’s stock price and earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison (Hayes, 2020). This P/E ratio is also used to compare the historical records within the same company. If a company’s P/E ratio is high then that means their stock is over-valued or investors are expecting the high growth rates. This P/E value can be calculated by dividing the current stock price by the earnings per share. P/E ratio of a stock tells us very little about it if it’s not compared to the company’s historical P/E or the competitor’s P/E from the same industry. The P/E is also called an earnings multiple. There are two types of P/E: trailing and forward. The trailing P/E is based on previous periods of earnings per share, while forward P/E ratio divides the current share price by the estimated future earnings per share.

Investors want to buy financially sound companies that offer a good return on investment (ROI). Companies with a high Price Earnings Ratio are often considered to be growth stocks. This indicates a positive future performance, and investors have higher expectations for future earnings growth and are willing to pay more for them. The downside to this is that growth stocks are often higher in volatility and this puts a lot of pressure on companies to do more to justify their higher valuation. For this reason, investing in growth stocks will more likely be seen as a risky. In essence, the price-to-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings (Hayes, 2020). Companies with a low Price Earnings Ratio are often considered to be value stocks. It means they are undervalued because their stock price trade lower relative to its fundamentals. This mispricing will be a great bargain and will prompt investors to buy the stock before the market corrects it. And when it does, investors make a profit as a result of a higher stock price. Investors not only use the P/E ratio to determine a stock’s market value but also in determining future earnings growth (Murphy, 2020).

I have selected Apple Inc. as one of the popular stock trading in NYSE under the AAPL. The information I found on the yahoo finance website for this stock are mentioned below. This company is listed as computer manufacturing sector. Its current stock price is $115.08 which was opened at 114.62 today. Apple’s 1 year target price is $123.12. The report shows its P/E ratio as 35.01 whereas it’s Earnings per share (EPS) is $3.29. Its market capital is 1.968 trillion. It was closed on the previous day at $113.16 and the highest price reached today was $115.55 and the lowest was $114.13. Report also mentioned about the forward dividend which was $0.82 and the yield was 0.7%.

References

Apple Inc. (AAPL) Stock Price, News, Quote & History. (2020, October 08). Retrieved from https://finance.yahoo.com/quote/AAPL/?guccounter=1

Hayes, A. (2020, September 11). Price-to-Earnings Ratio – P/E Ratio. Retrieved from https://www.investopedia.com/terms/p/price-earningsratio.asp

Murphy, C. (2020, September 16). Assessing a Stock’s Future With the Price-to-Earnings Ratio and PEG. Retrieved from https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/

 

Naren Work:

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Price-Earnings Ratio

The price-earnings ratio is the concept of taking a ratio between a company’s current share prices to its earning per share. The price-earnings ratio will help us know what the company is willing to pay for its earnings. The price to earnings ratio is also known as the price multiple or the earnings multiple (Rahman & Shamsuddin, 2019). The investors and analysts usually use the P/E ratios to determine the relative value of a company’s shares in an apples-to-apples comparison (Lutfi & Arsitha, 2016). This ratio is also used to compare the company against its historical record to compare aggregate markets against one another or over time. If its high P/E ratio, then the company stock is over-valued, or else the investors are getting high returns in the future. Companies that don’t have earnings or lose money then don’t have any P/E ratio because there is nothing to put in the denominator.

There are two kinds of P/E ratios calculated, and they are forward P/E, which is mostly used in practice. The forward P/E focuses on future earning, also called “estimated price to earnings.” There are problems with forwarding P/E, where companies overestimate or underestimate their earnings (Lutfi & Arsitha, 2016). The P/E ratio helps investors determine the market value of a stock compared to the company’s earnings. Notably, the price-to-earnings ratio can also be seen as a means of standardizing the value of one dollar of earnings throughout the stock market.

Among different companies trading common stock on NYSE, I have considered Abbott laboratories, which trade common stock. The information that is present in the stock trading report is about the sector of the company industry. The information is very useful for the investor to invest in the company. In essence, this information is vital in the analysis of the numerous factors affecting the prices of stocks in the market.

 

References

Lutfi, M., & Arsitha, J. (2016). The analysis of factors affecting price earnings ratio on the company shares registered in Jakarta Islamic Index. Academic Journal of Economic Studies2(3), 55-63.

Rahman, M. L., & Shamsuddin, A. (2019). Investor sentiment and the price-earnings ratio in the G7 stock markets. Pacific-Basin Finance Journal55, 46-62.

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