imported>Doug Williamson |
imported>Doug Williamson |
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| (PER).
| | The amount of information available to market participants about prices. |
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| The ratio of the equity value of a company to its accounting earnings (profit after tax).
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| The PER (or PE ratio) can be calculated either on a per-share basis or on the total equity value and total earnings, giving identical results.
| | Price transparency takes two forms: |
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| | 1. 'Pre-trade transparency', i.e. the prices at which counterparties advertise they are willing to buy or sell specific financial instruments. |
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| Per share:
| | 2. 'Post-trade price transparency', i.e. the prices at which counterparties recently bought or sold specific financial instruments. |
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| PE ratio = Current share price ÷ Earnings per share.
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| On total values:
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| PE ratio = Total equity value ÷ Total earnings.
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| '''Example 1'''
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| Company A's total equity value is $630m and its relevant earnings are $63m,
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| the PE ratio = $630m / $63m
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| = 10.
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| The Price to earnings ratio reflects the market's perception of the risk and the future growth prospects of the company.
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| A higher PE ratio generally indicates that the market perceives:
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| *better growth
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| *lower risk
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| *or both
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| Lower PE ratios suggest lower growth (or indeed decline), higher risk, or both
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| PE ratios can also be used as a very simple estimation or comparison model, for corporate valuation.
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| '''Example 2'''
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| In another case, say comparable PE ratios for an unlisted Company B are 12, and Company B's relevant earnings are $10m.
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| The total value of Company B's equity can be estimated on this basis as:
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| 12 x $10m
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| = $120m.
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| Very simplistically, shares trading on low PE ratios might be perceived as relatively cheap. Similarly, shares trading on higher PE ratios would be seen as relatively expensive.
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| A better use of PE ratios is as a sense-check of the results and insights from other valuation methods.
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| Sometimes written as ''P/E ratio''.
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| ''Also known as price earnings ratio.''
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| == See also == | | == See also == |
| * [[Bootstrap effect]] | | *[[Circuit breaker]] |
| * [[Earnings]] | | *[[Electronic communication network]] |
| * [[Earnings multiples]] | | *[[Price discovery]] |
| * [[Earnings per share]] | | *[[Price formation]] |
| * [[Earnings yield]]
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| * [[Historic]]
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| * [[Multiples valuation]]
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| * [[Prospective]]
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| * [[Ratio analysis]]
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| * [[EBITDA multiple]]
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The amount of information available to market participants about prices.
Price transparency takes two forms:
1. 'Pre-trade transparency', i.e. the prices at which counterparties advertise they are willing to buy or sell specific financial instruments.
2. 'Post-trade price transparency', i.e. the prices at which counterparties recently bought or sold specific financial instruments.
See also
