Price taker and Price to earnings ratio: Difference between pages
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A | (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 == | ||
* [[ | * [[Bootstrap effect]] | ||
* [[ | * [[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.