Price-income or P/E is one of the most widely-used stock analysis tools is used by investors and analysts to determine inventory valuation. In addition to showing whether the company’s stock price is overvalued or undervalued, the P/E may disclose how the valuation of the stock compared to its industry group or a benchmark index like the S&P 500.
The P/E ratio helps investors to determine the market value of the shares compared to the revenues of the company. In short, the P/E ratio shows what the market is willing to pay today for the stock based on its past or future earnings.
The Components Of The Ratio P/E
The Market Price
- Market price of a stock, typically used for the ratio R/E.
- Stock price per share is set of demand and supply in prevailing market.
Earnings per share
- Earnings per share value of the Company’s profit allocated to each outstanding Share of common stock of the company, as a measure of the financial condition of the company. In other words, EPS is the portion of the net income of the company to earn per share if all the proceeds were paid to the shareholders. EPS is commonly used by analysts and traders to establish financial stability.
- EPS provides a “e” or earnings part of the P/E (price / earnings) ratio evaluation, where EPS = profit ÷ total number of shares of the company.
- While the company has positive earnings, the P/E ratio can be calculated. The company without a profit or loses money, is the ratio P/E.
- Similar to stock price, earnings per a share price will vary, depending on the financial performance of the company and who have used the option earnings.
- Typically, EPS are taken from the last four quarters, called a trailing EPS and is commonly called TTM for trailing twelve months. However, EPS can also be taken from estimates of future revenue expected over the next four quarters is called forward EPS.
As a result, the company will have more than one ratio P/E, investors should be careful to compare the same P/E in the evaluation and comparison of different stocks.
The Calculation Of The Ratio P/E
For the calculation of P/E, you can use the following formula:
For example, the ratio P/E: comparison of Bank of America and JPMorgan chase
As of the end of 2017, the Corporation, Bank of America (BAC) ended the year with the following:
- Stock Price = $29.52
- EPS = $1.56
- P/E = 18.92 or $29.52/$1.56
In other words, Bank of America is trading around 19xs earnings. However, 18.92 P/E by itself is not very useful if you have something to compare. A General comparison may be with the industrial group shares the control of the index or the historical p/e range stock.
Bank of America R/E were slightly higher than the S&P 500 and which, as a rule, an average of about 15xs earnings.
Compare Bank of America p/e peer-to-peer Bank will calculate the P/E to Houston JPMorgan chase & co. (PDM) by the end of 2017.
- Stock Price = $106.94
- EPS = $6.31
- P/E = 17.00
When you compare BofA’s P/E of nearly 19 for analysts JPMorgan’s P/E of 17, shares of Bank of America appears to be not so overrated as it was when compared to the average P/E of 15 for the s&P 500.
High ratio of Bank of America’s P/E could mean that investors are expecting higher earnings growth in the future compared to JPMorgan and the market in General.
However, no single ratio can tell you all you need to know about the campaign. Before investing, please use various financial ratios to determine whether a stock is fairly valued and whether the financial condition of the company justifies the cost of its shares.
More detailed information about the ratio R/E how to use it, and potential drawbacks, please read the ratio R/E: what is it?