Price to earnings ratio: Difference between revisions

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(PER).  
(PER).  


The ratio of the equity value of a company to its accounting earnings (profit after tax).
The ratio of the equity capitalisation 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.
The PER (or PE ratio) can be calculated either on a per-share basis or on the total equity capitalisation and total earnings, giving identical results.




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On total values:  
On total values:  


PE ratio = Total equity value ÷ Total earnings.
PE ratio = Total equity capitalisation ÷ Total earnings.




<span style="color:#4B0082">'''Example 1'''</span>
<span style="color:#4B0082">'''Example 1'''</span>


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


the PE ratio = $630m / $63m  
the PE ratio = $630m / $63m  
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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.
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:
The approximate total value of Company B's equity can be estimated on this basis as:


12 x $10m  
12 x $10m  
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* [[Bootstrap effect]]
* [[Bootstrap effect]]
* [[Capitalisation]]
* [[Capitalisation]]
* [[Cyclically Adjusted Price to Earnings ratio]]
* [[Dividend yield]]
* [[Earnings]]
* [[Earnings]]
* [[Earnings multiples]]
* [[Earnings multiples]]

Latest revision as of 19:42, 22 April 2023

(PER).

The ratio of the equity capitalisation 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 capitalisation and total earnings, giving identical results.


Per share:

PE ratio = Current share price ÷ Earnings per share.


On total values:

PE ratio = Total equity capitalisation ÷ Total earnings.


Example 1

Company A's total equity capitalisation 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.


Example 2

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

The approximate 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