Price to Earnings ratio (P/E ratio) also called earnings multiple of a stock refers to the measure of the price paid for a share compared to the net income or earnings of a company. The P/E ratio reflects the capital structure of the company. A higher P/E ratio means the investors are paying more for each unit of net income; therefore, the stock is more expensive in relation to one with a lower P/E ratio. The P/E ratio expressed in years, shows the number of years of earnings which would be required to pay back purchase price ignoring inflation. The P/E ratio can also show current investors demand for a company share. The reciprocal of the P/E ratio is the earnings yield. Companies with high P/E ratios are more likely to be considered risky investments than those with a low P/E ratio. If the price of a share rises and the EPS remains constant then the P/E multiple will rise, if the share price falls with a constant EPS the P/E falls. Companies that are not profitable or those companies which have negative earnings don’t have a P/E ratio. Types of P/E ratio There are three main types of P/E ratio: • Trailing P/E ratio - the price/ earnings ratio for the last four quarters or of one year. • Projected or forward ratio - the price/ earnings for the projected next four quarters or one year. • Rolling P/E ratio - the price/ earnings ratio for the last two quarters and the projected next two quarters. It is said that the most accurate P/E ratio is the trailing P/E since the forward and rolling P/E based on projected figures. Importance of P/E ratio The P/E ratio indirectly includes key fundamentals of a company such as future growth and risk. It basically takes into account the following aspects: Past Performance – a company with ... ... middle of paper ... ... in the economy do also, leading investors to demand a higher rate of return to maintain their purchasing power. If investors demand a higher rate of return, the P/E ratio will knowingly fall. As shown below on the Trinidad and Tobago Stock Market this seemed to be the case in fact. During 2004 inflation was relatively low at 3.7%, while P/E rations was at its high of 20.61. While in 2008 inflation was at its highest peaked of 12% whereas P/E ratios were at its historical low of 12.21. INFLATION HIGH AVERAGE LOW 12% (2012) 8.5% 3.7% (2004) http://stockshastra.moneyworks4me.com/basics-of-investing/understanding-pe-ratio-and-its-importance/ http://en.wikipedia.org/wiki/Trinidad_and_Tobago_Stock_Exchange http://www.wiseequities.com/markets/marketreports.php http://www.cavehill.uwi.edu/fss/resources/research-and-publications/clico-s-collapse-_wayne-soverall.aspx
Equity ratio and debt ratio are both very important because it shows how much of the assets used for production is really owned by the owner of a company. According to calculations in the appendix, RBC has the highest equity ratio and the lowest debt ratio. This is considered favourable compared to Sun life and BMO’s equity and debt ratio. When it comes to return on total assets BMO has the highest return. Meaning it is earning more per assets than RBC and Sun
Price-To-Book Ratio is also known as the “price-equity ratio,” and is used to compare the stock price value to that stock’s book value. A low P/B ratio may indicate that the stock is undervalued or that something is very wrong within a company. However, Honeywell’s price-equity ratio (4.43) is better than the industry average and is worse than the S&P average, which may indicate to the shareholders that they are paying a little more than what would be a fair price for Honeywell stocks.
There is increase in the company's revenue and Earnings per share (EPS) which will attract investors to invest their money in the company (finance/accounting).
Cracker Barrel has experienced a constant increase in its price/earnings ratio, with only one decrease in 2011, the only year to suffer a decrease in the company’s market price. This ratio indicates that investors were willing to pay an average of $14 for each $1 of earnings during the five year period. In 2013, the price/earnings ratio significantly increased as the market price at the year-end almost doubled. During the five year period, Cracker Barrel has been able to increase the confidence investors have in the company’s future performance.
...59 This ratio must appear on the face of a company's income statement. Nike (EPS) is up from 1.35 in 2008.
Ratios for return on assets and return on equity offer support for the loss in stockholders’ equity. Return on assets went from 13.1 in 2000 to 5.1 in 2001 and return on equity dropped from 25.4 in 2000 to 8.7 in 2001. Return on equity represents return on assets divided by the difference of 1 and debts/assets.
Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
Income statements also show Earnings Per Share (EPS). EPS shows how much money shareholders would receive if all of the net earnings for the period were distributed. (A highly unlikely occurrence; they’re usually reinvested.)
In the Market Performance chart, it is broken into two categories which are Earnings per Share and Price Earnings Ratio. As with any market it is important to understand and gauge key performance indicators and evaluate these goals as it establishes the execution for the future. In the Market performance chart EPS; it measures the firm’s performance, and provides to the shareholder an amount of earnings available. Both Google Inc. (GOOG) and Yahoo! Inc. (YHOO) since 2008 continue to increase in a 5 year review as GOOG in 2012 established an 85% increase while YHOO merged to a staggering 1080%.
This section will discuss ratio analysis for the following ratios: current ratio, quick (acid-test) ratio, average collection period, debt to assets ratio, debt to equity ratio, interest coverage ratio, net profit margin, and price to earnings ratio. Depending on the end user which ratio carries more importance, however, all must be familiar with ratio analysis. Details on each company's performance for each of these areas can be found in the attached ratio analysis worksheet.
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Investment valuation ratios compare current share price to various per-share performance indicators such as earnings, dividends, sales, and operating cash flow to help investors evaluate whether the stock is overvalued, fairly, or undervalued as an investment opportunity. Income, value and growth investors have different investment objectives and thus may have different views on a stock’s value relative to its price.
Investors in the stock market judge earnings growth against two figures: the average industry earnings and the estimated earnings for the company. If analysts predict earnings to be above the industry average, a company’s stock price will usually rise. If companies report earnings higher than predicted, stock price will typically rise even more.
Fundamental Analysts are concerned with the company that underlies the stock itself. They evaluate a company's past performance as well as the credibility of its accounts. Many performance ratios are created that aid the fundamental analyst with assessing the validity of a stock, such as the P/E ratio.
P/ Ratio = Market Cap (M) / Revenue/ E Ratio can be thought of as time taken by WBA to earn back price paid for stock. Current P/E is less expensive than its