What is Price Earning Ratio (PER ) – Price to Earning Ratio formula or usually abbreviated as PER (P/E Ratio) is market price ratio per share to net profit per share.
The Price Earning Ratio is the company’s current price-per-share valuation ratio compared to the net profit per share. Price Earnings Ratio is a ratio that is often used to evaluate prospective investments.
This ratio is also used to assist investors in making decisions on whether to buy certain company shares or not. Generally, traders or investors will calculate PER or P / E Ratio to estimate the market value of a stock.
The Price Earning Ratio (PER) formula
This Price Earning Ratio (P / E Ratio) is calculated by distributing ” Market Value per Share ” with “Earnings per Share ( EPS )”.
The market value per share data can be taken from the stock market or stock exchange while Earning per Share can be calculated by distributing Net Profit to the number of shares in the market.
Please to also read Understanding EPS (Earning per Share or Earnings per Share).
The following is the Price Earning Ratio formula:
Price Earnings Ratio (PER) = Share Price / Earnings per Share
- Revenue is called the Price Earnings Ratio (PER).
- Stock prices are often referred to as Market Prices per Share.
- Earnings Per Share is EPS)
By calculating the Price Earning Ratio, we can find out how much the price to be paid by the market against the income or profit of a company.
If the PER is higher that means the market is willing to pay more for a company’s revenue or profit and has high expectations for the company’s future share. On the other hand, a lower Price Earnings Ratio indicates that the market does not have sufficient confidence for the company’s future shares.
The average Price Earning Ratio of a stock is usually 12 to 15, but this value depends on the market and economic conditions. The assessment of PER also varies depending on the industry in which it operates. Each industry has a different assessment of its P / E ratio.
Example calculation of PER ( Price Earning Ratio )
For example, if the price per share of company A is $5, – with an EPS ratio of $2. Then the P / E ratio is $ 5 / $ 2 = $ 2,5, -. This indicates that the Investor is willing to pay $ 2,5, – for every $ 1 company revenue. For companies that experience negative losses or income, the P / E ratio is usually stated as “none” or usually written as “N / A” or “Not Applicable”.
Rating PER ( Price Earnings Ratio )
A high Price Earning Ratio may not always be a positive indicator because a high PER ratio can be caused by ” Overpricing ” on the stock. On the other hand, a low Price Earning Ratio is not necessarily a negative indicator, it may be that the stock is being ignored by the market or has not been actively traded.
Therefore, this Price Earning Ratio must be used with precaution. Investment decisions should not only be based on this P / E ratio, but investors must also consider other ratios to make a decision whether to buy or not buy certain stocks, such as profitability ratios.
The problem that is most frequently discussed about this P / E ratio is the calculation of the denominator which also includes non-cash goods so that the income figures can be easily manipulated, for example by entering depreciation or amortization.
Although not deliberately manipulated, income figures can still be affected by non-cash items. For this reason, most investors use the “Price to Cash Flow Ratio” for calculations that eliminate non-cash items and only pay attention to cash or cash.