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Earnings factor |
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Earnings factorThis is a theoretical earnings figure that is used for working out state pensions or guaranteed minimum pensions.Similar MatchesNormalised earningsNormalised earningsSee 'adjusted earnings'. Band earningsBand earningsPay between the lower earnings limit and upper earnings limit which is used to determine National Insurance Contributions. EarningsEarningsThe total amount earned, usually by a worker as wages, or by a firm as profits. Adjusted earningsAdjusted earningsIf a company's earnings figures are distorted either positively or negatively by exceptional one-off occurrences in the year, its directors can choose to clarify the performance by releasing adjusted earnings. In other words, earnings with the exceptional items stripped out which they believe are more representative of its underlying performance. Price earnings growth factorPrice earnings growth factorThe PEG of a company is calculated by dividing its prospective P/E ratio by the estimated future growth rate in earnings per share of the company. So to calculate a PEG, you first need to calculate its P/E ratio.P/E = current share price divided by earnings per shareA company with a share price of 100p and earnings per share of 5p has a P/E ratio of 100/5 = 20.By itself the P/E ratio is a useful ratio because it shows how many times the current earnings the shares cost - in a sense, how many years you would have to wait to get your money back if the company paid out all its earnings to shareholders. But the limitation of the P/E ratio is that it looks at historical information and does not relate the price of the shares to its future performance. The PEG ratio builds in that extra layer of sophistication.Using the example of the same company, imagine that the consensus brokers' forecast for its future earnings growth rate is 15%.PEG = P/E divided by estimated future growth rateFor this company, the PEG would be 20 divided by 15 = 1.33.According to Jim Slater, the investor who popularised the use of PEG's as a stock share selection tool, a share with a PEG of 1 or lower is attractive. Put simply, the lower the PEG, the less you are being asked to pay for estimated future earnings. Jim Slater did not recommend use of the PEG as the only criteria of share selection. There are plenty of other fundamental checks that have to be made too.Note that the estimated future earnings are a critical part of the PEG calculation, and that if the forecasts made by brokers are wide of the mark, the PEG ratio will be unreliable. Because of this danger, most advocated of PEG's recommend using consensus forecasts, rather than the forecasts of any single broker/analyst. Further Suggestionsupper earnings levelEarnings before taxes (EBT) Quality of earnings earnings price earnings ratio (P/E ratio) Earnings before interest and, taxes (EBIT) Earnings before interest, taxes, and depreciation (EBITD) Earnings taxable earnings Fully diluted earnings per shares lower earnings limit earnings per share net relevant earnings Normalized earnings Accounting earnings Earnings before interest, taxes, depreciation, and amortization (EBITDA) Retained earnings Earnings response coefficient Pretax earnings or profits Earnings before interest after taxes (EBIAT) Earnings retention ratio earnings cap earnings yield retained earnings Earnings yield |
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