1 / 13

UNDERSTANDING THE P/E RATIO

UNDERSTANDING THE P/E RATIO. Mrs. Purdy April 7, 2013. Please Do Now…. In your notebook, please answer the following questions: What is the Market Value of Target? What is Target’s P/E Ratio? What is Target’s EPS?. TODAY’S GOALS. What is the P/E Ratio? How can we use the P/E Ratio?

knox-mcfarland
Download Presentation

UNDERSTANDING THE P/E RATIO

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. UNDERSTANDING THE P/E RATIO Mrs. Purdy April 7, 2013

  2. Please Do Now… • In your notebook, please answer the following questions: • What is the Market Value of Target? • What is Target’s P/E Ratio? • What is Target’s EPS?

  3. TODAY’S GOALS • What is the P/E Ratio? • How can we use the P/E Ratio? • Problems with the P/E Ratio. • Buy or Sell?

  4. DEFINITIONS TO KNOW • Blue Chips • Earnings • Earnings Per Share (EPS) • Short Selling • P/E Ratio

  5. WHAT IS THE P/E RATIO? • The ratio of a company’s share price to its per-share earnings. • As the name implies, to calculate the P/E you simply take the current stock price and divide by its EPS(earnings per share): P/E Ratio=Market Value per Share (Price) Earnings per Share (EPS)

  6. LET’S PRACTICE… At the end of the trading day, ABC stock closed at a price of $36.95 per share. ABC announced earnings of $1.80 per share for the year. What will the P/E ratio be for ABC? SOLUTION: P/E Ratio=Market Value per Share/EPS P/E Ratio=$36.95/$1.80 P/E Ratio=20.53

  7. HOW CAN WE USE THE P/E RATIO? What does a P/E Ratio of 20.53 mean??!! THINK!! P/E Ratio=20.53 Simply put, this means that investors are willing to pay $20.53 for every $1 of earnings the company generates.

  8. HOW CAN WE USE THE P/E RATIO? • Not just past performance • Market expectations for a company’s growth • Indication of the value of a stock • P/E ratio is much better than market price alone • CHEAP OR EXPENSIVE?

  9. HOW CAN WE USE THE P/E RATIO? But…two main factors to see if a P/E is high (over-valued) or low (under-valued)… • Company Growth: Low growth but high P/E = overpriced! Ex: Microsoft went from P/E = 100 late 1990s to 43 by June of 2002. • Compare companies in the same industry. Ex: Utilities = low growth, stable. P/E ratios by industry on Yahoo! Finance.

  10. PROBLEMS WITH THE P/E RATIO? • Accounting • Inflation • Various interpretations

  11. BUY OR SELL? • The P/E ratio is not the only variable we look at when deciding to buy or sell a stock!! • There are many other data variables that help us analyze stocks such as the peg ratio, book value & growth rate. • If you want to find out more about analyzing stocks, take the wealth management course!

  12. A LOOK AHEAD Next, we will be learning about Brokers & Online Trading

  13. QUESTIONS???

More Related