Price taker and Price to earnings ratio: Difference between pages

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A firm or other market participant which is unable to influence price.
(PER).
 
The ratio of the equity value of a company to its accounting earnings (profit after tax).
 
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.
 
 
Per share:
 
PE ratio = Current share price ÷ Earnings per share.
 
 
On total values:
 
PE ratio = Total equity value ÷ Total earnings.
 
 
For example if Company A's total equity value is $630m and its relevant earnings are $63m,
 
the PE ratio = $630m / $63m
 
= 10.
 
 
The Price to earnings ratio reflects the market's perception of the risk and the future growth prospects of the company.
 
A higher PE ratio generally indicates that the market perceives:
*better growth
*lower risk
*or both
 
Lower PE ratios suggest lower growth (or indeed decline), higher risk, or both
 
 
PE ratios can also be used as a very simple estimation or comparison model, for corporate valuation.
 
In another case, say comparable PE ratios for an unlisted Company B are 12, and Company B's relevant earnings are $10m.
 
The total value of Company B's equity can be estimated on this basis as:
 
12 x $10m
 
= $120m.
 
 
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.
 
A better use of PE ratios is as a sense-check of the results and insights from other valuation methods.
 
 
Sometimes written as ''P/E ratio''.
 
''Also known as price earnings ratio.''




== See also ==
== See also ==
* [[Perfect competition]]
* [[Bootstrap effect]]
* [[Price maker]]
* [[Earnings]]
* [[Earnings multiples]]
* [[Earnings per share]]
* [[Earnings yield]]
* [[Historic]]
* [[Multiples valuation]]
* [[Prospective]]
* [[Ratio analysis]]
* [[EBITDA multiple]]

Revision as of 14:52, 30 May 2015

(PER).

The ratio of the equity value of a company to its accounting earnings (profit after tax).

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.


Per share:

PE ratio = Current share price ÷ Earnings per share.


On total values:

PE ratio = Total equity value ÷ Total earnings.


For example if Company A's total equity value is $630m and its relevant earnings are $63m,

the PE ratio = $630m / $63m

= 10.


The Price to earnings ratio reflects the market's perception of the risk and the future growth prospects of the company.

A higher PE ratio generally indicates that the market perceives:

  • better growth
  • lower risk
  • or both

Lower PE ratios suggest lower growth (or indeed decline), higher risk, or both


PE ratios can also be used as a very simple estimation or comparison model, for corporate valuation.

In another case, say comparable PE ratios for an unlisted Company B are 12, and Company B's relevant earnings are $10m.

The total value of Company B's equity can be estimated on this basis as:

12 x $10m

= $120m.


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.

A better use of PE ratios is as a sense-check of the results and insights from other valuation methods.


Sometimes written as P/E ratio.

Also known as price earnings ratio.


See also