siding installation lakewood vinyl siding cost glenview hardie siding cement board siding siding companies .. Chicago Drug testing

Price to Earnings Ratio - P/E

After finding the price of a particular stock, usually the next number everyone looks at is the P/E ratio.

P/E is the ratio of a company's share price to its per-share earnings.

A P/E ratio of 10 means that the company has 1 of annual, per-share earnings for every 10 in share price. (Earnings by definition are after all taxes etc.)

A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings. A company's per-share earnings are simply the company's after-tax profit divided by number of outstanding shares. A company that earned 5M last year, with a million shares outstanding, had earnings per share of 5. If that company's stock currently sells for 50/share, it has a P/E of 10. At this price, investors are willing to pay 10 for every 1 of last year's earnings.

P/Es are traditionally computed with trailing earnings (earnings from the past 12 months, called a trailing P/E) but are sometimes computed with leading earnings (earnings projected for the upcoming 12-month period, called a leading P/E).

For the most part, a high P/E means high projected earnings in the future. But actually the P/E ratio doesn't tell a whole lot, but it's useful to compare the P/E ratios of other companies in the same industry, or to the market in general, or against the company's own historical P/E ratios.

Some analysts will exclude one-time gains or losses from a quarterly earnings report when computing this figure, others will include it. Adding to the confusion is the possibility of a late earnings report from a company; computation of a trailing P/E based on incomplete data is rather tricky. (It's misleading, but that doesn't stop the brokerage houses from reporting something.) Even worse, some methods use so-called negative earnings (i.e., losses) to compute a negative P/E, while other methods define the P/E of a loss-making company to be zero. Worst of all, it's usually next to impossible to discover the method used to generate a particular P/E figure, chart, or report.

Like other indicators, P/E is best viewed over time, looking for a trend. A company with a steadily increasing P/E is being viewed by the investors as becoming more speculative. And of course a company's P/E ratio changes every day as the stock price fluctuates.

The P/E ratio is commonly used as a tool for determining the value of a stock. A lot can be said about this little number, but in short, companies expected to grow and have higher earnings in the future should have a higher P/E than companies in decline.

For example, if a company has a lot of products in the pipeline, I wouldn't mind paying a large multiple of its current earnings to buy the stock. It will have a large P/E. I am expecting it to grow quickly. A rule of thumb is that a company's P/E ratio should be approximately equal to that company's growth rate.

PE is a much better comparison of the value of a stock than the price. A 10 stock with a PE of 40 is much more "expensive" than a 100 stock with a PE of 6. You are paying more for the 10 stock's future earnings stream. The 10 stock is probably a small company with an exciting product with few competitors. The 100 stock is probably pretty staid - maybe a buggy whip manufacturer.

It's difficult to say whether a particular P/E is high or low, but there are a number of factors you should consider!

First: It's useful to look at the forward and historical earnings growth rate. (If a company has been growing at 10% per year over the past five years but has a P/E ratio of 75, then conventional wisdom would say that the shares are expensive.)

Second: It's important to consider the P/E ratio for the industry sector. (Food products companies will probably have very different P/E ratios than high-tech ones.)

Finally: A stock could have a high trailing-year P/E ratio, but if the earnings rise, at the end of the year it will have a low P/E after the new earnings report is released.

Thus a stock with a low P/E ratio can accurately be said to be cheap only if the future-earnings P/E is low.

If the trailing P/E is low, investors may be running from the stock and driving its price down, which only makes the stock look cheap.

Ioannis - Evangelos C. Haramis was born in Greece in 1951 and he studied in Greece, USA and in Belgium. He has been active in the stock markets since 1972. Since 2002 he is New Business Development Managing Director at an Investment Bank and the publisher of http://www.greekshares.com/

Copyright ? 2005 I.E.C. Haramis

haramis@greekshares.com

In The News:

Its Snowing

The Winter Games for the Olympics are coming up soon... Read More

Market Globalization

Just 30 years ago the stock market was a shadow... Read More

A Triple Dipper: How to Make 3 Profits on 1 Stock Trade

This is a rather simple strategy with which I am... Read More

Mutual Fund Honor Roll ? Buy High, Sell Low by Chasing Performance

Buy high and sell low -- It's not a typo.Millions... Read More

Stops Make Money

During the day I watch CNBC-TV, the stock market channel.... Read More

Prospering with Mutual Funds: How Anyone can ?Afford? an Investment Advisor

Recently I was invited to appear on a live CNNfn... Read More

How Covered Calls Turned a Trader Around

Sidney felt sick as she looked at her latest OptionsXpress... Read More

Complacency Indicator

If you haven't heard of the technical indicator with the... Read More

365/7/24

What does it take to be a stock trader? It... Read More

Emotional Involvement

I'll bet with almost anyone that has stocks or mutual... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Shorting Stocks ? The Basics, Part I of II

What does it mean to short a stock?This means that... Read More

Evaluation II

As I said in Part I everyone in the insane... Read More

Pension Plans

If you have a pension plan at work you will... Read More

Your Trading Objective: Why is that so Important?

You've decided to try your luck at trading stocks or... Read More

Series 7 Exam

What is the Series 7 Exam? If you... Read More

Hedge Funds

You read and hear a lot about hedge funds. Unfortunately,... Read More

Buying New Issues

Has your broker been calling you recently with the "great... Read More

Picking Mutual Funds to Outperform the Market

With over 6,000 mutual funds available, it may be tempting... Read More

Enron Cure

Let's hope you did not have any of the Enron... Read More

Understanding the Bulls and the Bears

If you've ever flipped on the television to CNN Financial... Read More

Trading For A Living - Part 1

There can't be many traders who haven't at least considered... Read More

Patterns

The Law of Chaos is the theory of random unpredictable... Read More

Price Targets

Every day in any financial publication you will find the... Read More

Long Term Financial Vehicles

Investing in long-term financial vehicles give you the most gains... Read More

industrial led light led light manufacturers in usa Pete's produce ..
industrial led light led light manufacturers in usa Pete's produce ..