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Price earnings ratio (P/E ratio) |
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Price earnings ratio (P/E ratio)P/E = current share price of a company divided by its earnings per shareA company with a share price of 100p and earnings per share (EPS) of 5p has a P/E ratio of 100/5 = 20.A company's P/E (also known as its multiple) shows how high its shares are priced in relation to its historical earnings. Although mathematically, it relates share price to past performance, the reality is that P/Es are more about forward expectations than the past. A high P/E indicates that the City expects the company's earnings to grow fast in the future.P/E 're-ratings' by the City can have a dramatic effect on share price. If a company regarded as a growth stock announces sharply reduced trading figures, fund managers may revise their view of the company, and decide that it doesn't justify a growth stock P/E of 20, and can only justify a more normal P/E of, say 12. If earnings were 10p share, that re-rating would suggest a change in share price from 200p to 120p.Equally, if a company announces some major technical breakthrough, or a major contract, the City may decide that its future earnings potential justifies a growth P/E, and re-rate it upwards from 12 to 20 (or equivalent figures). In which case the share price will leap.There is nothing formal about this re-rating procedure. It is simply buyers in the market pushing up the price to reflect a new perception of a company. But P/Es do tend to be comparative, in that companies in the same sector with similar prospects would normally have similar P/Es. If they don't, there is invariably a reason accounting for the difference.Similar MatchesEarnings response coefficientEarnings response coefficientA measure of relation of stock returns to earnings surprises around the time of corporate earnings announcements. Normalized earningsNormalized earningsEarnings that have been adjusted in order to take into account the effect of cycles in the economy. Earnings yieldEarnings yieldThe earnings of a company are its annual profits after deduction of tax, dividends to preference shareholders and bondholders. They are usually expressed on a per-share basis (e.g. 7p), and the earnings per share (EPS) figure is calculated by dividing total earnings by the average number of shares in issue for the relevant accounting period.e.g. earnings or £2m, with 10m shares in issue would give an EPS of 20pThe earnings yield is the EPS as a percentage of the current market price of the share. So if the EPS was 7p and the current market price is 116p, the earnings yield7 / 116 x 100 = 6.03%Earnings yield is not used as commonly as its reciprocal measure, the P/E ratio. On the same figures, the P/E would be:116 / 7 = 16.6 Pretax earnings or profitsPretax earnings or profitsNet income before federal income taxes are subtracted. Earnings price ratioEarnings price ratioSee: Earnings yield Further SuggestionsAccounting earningsEarnings Retained earnings earnings factor retained earnings band earnings earnings Earnings before interest, taxes, and depreciation (EBITD) normalised earnings upper earnings level State Earnings Related Pension Scheme Primary earnings per (common) share Quality of earnings Earnings yield Earnings momentum Earnings earnings per share Earnings before interest, taxes, depreciation, and amortization (EBITDA) Earnings before taxes (EBT) Fully diluted earnings per shares Earnings retention ratio taxable earnings earnings cap Earnings before interest and, taxes (EBIT) price earnings growth factor |
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