Currently, stock investment is attracting the attention of many people. However, to enter this field, you need to understand the basic knowledge as well as related terms. One of the terms when investing in stocks that you cannot ignore is the P/E ratio. In the following article, we will help you learn about the concept of P/E ratio and all you need to know about this term.
What is the concept of P/E ratio and what to know about this term.
What is the meaning of P/E ratio?
What is the P/E ratio is a question for everyone new when they watch the news or enter the billion dollar investment field in the stock market. The most accurate formula for calculating P/E and how to use PE to identify highly profitable stocks will be answered by Finnews24 in the next part of the article.
P/E . concept
The P/E ratio (short for Price to Earning to Ratio) is an index that measures the market relationship between a stock's value (Price) and earnings per share (EPS) .
Simply put, P/E speaks to the ability of investors to break even. The time to buy stocks at this price is expensive or cheap is based on PE to judge.
To know the details of the market price and earnings of a stock like, investors need to rely on the P/E ratio. Based on this data will help determine how much to pay for 1 share.
Eg:
To make it easier for readers to understand, we will take a specific example as follows: An Alibaba stock is for sale and investors are willing to spend $ 35.16 to buy it in exchange for an income of $ 1. every month.
So if an investor owns a stock, it will take them 35 months to get the initial capital invested and only really make a profit in the 36th month, equivalent to 3 years.
This shows that the lower the P/E ratio, the higher the investor's return, and vice versa if the P/E ratio is high, the investor's breakeven time will be longer due to the net profit earned. gain per share is low. I will explain in detail later why low EPS is bad for P/E.
How to use the formula to calculate PE?
After learning about the concept of P/E ratio, we will share with you the formula to calculate this index. To calculate the P/E of a stock, you need to capture the Price and Earn per Share.
Formula to calculate P/E
Market Price: The current price of the stock.
Earn per Share (EPS): Earning line per share.
Types of P/E . ratios
PE is divided into two commonly used types: Forward P/E and Trailling P/E , also known as Forward PE and Lookup PE.
Forward P/E (Forward P/E)
Forward P/E: Used in corporate income statements.
Purpose: Forecast earnings for the next 4 quarters.
Forward P/E = Stock Market Price/ Expected EPS
Trailing P / E (P / E between cứu)
Look up P/E: Usually published in newspapers.
Trailing P/E is the P/E calculated by dividing the current stock price (P) by the total EPS earnings for the past 12 months.
Which type of P/E is more commonly used?
Trailing P/E is a metric used to predict stock prospects because it's a fairly objective metric. Investors often prefer to watch P/E Trailing because they don't trust the future EPS estimate of the Forward P/E calculation.
Important factors affecting the P/E . ratio
To make an accurate judgment about the P/E ratio, you need to know the reasons that affect it. So what factors affect the change of PE?
What factors affect the change of P/E ratio?
Income and price
Income level and price of stocks and securities are the factors that greatly affect the P/E ratio. If prices are high but earnings are low, the P/E ratio will increase.
Conversely, high income but low prices, the P/E ratio will decrease. So, capture the information about price and earnings to get the best P/E assessment.
Economic conditions
Economic conditions are also one of the factors that strongly affect the P/E ratio. Because it affects both corporate income and financial markets.
If the economy is growing and inflation is low, then the P/E ratio will increase. As a result, earnings and stock dividends will increase significantly.
On the contrary, high inflation combined with slow economic growth will cause P/E to decrease.
Dividend Policy
For dividend payment will not affect income. However, investors still spend higher amounts to buy shares.
Through this policy, investors can receive regular dividends, especially with low yield. Companies with good dividend policy will mean a high P/E ratio.
Business growth potential
Many people are willing to spend a large amount of money to buy stocks. Because they will get a profit from the investment if they realize the development potential of the business such as: expanding the market, developing new products/services, etc. These are part of the factors affecting the business. P/E ratio.
The growth potential of the business has a strong impact on the P/E ratio.
Debts of businesses
If a business has many different debts, it will cause the P/E ratio to drop significantly. This is also one of the reasons why investors are concerned. If the cost of debt is high, it will negatively affect the future income of the business. As a result, the stock price will decrease.
How good is the P/E used to gauge a stock?
PE figures are only a rough representation of stock value. This indicator is not recommended for investors looking to trade, but it is a highly accurate method when used to assess the trend of a stock.
Relying on a P/E ratio is similar to how a trader plans and predicts future revenue trends for a business.
What does a high or low P/E ratio reflect?
High P/E is a sign of inefficient business operations of the enterprise, which causes low EPS (even close to 0) will result in a large P/E ratio.
A low P/E shows investors that EPS (net earnings per share) is high. Will this help them decide whether to buy the stock or not?
Some special cases to pay attention to when considering the P/E . ratio
There are some cases you should pay attention to because it will cause the P/E ratio of the business to be abnormally low such as selling assets, liquidating assets, etc. This profit is only available at a certain time and that will not be repeated in the future. The company's liquidation or sale of assets becomes the cause of the sudden increase in EPS, making PE low and that is a drawback that P/E should only be used as a reference.
In some cases, when the holding shareholders feel that the business situation of the enterprise is not efficient, they have decided to sell their holding shares to the market to take profits. corporate P/E fell low.
Therefore, basing on P/E to determine stock value is only accurate at certain times, if you want to determine whether a company's stock is really effective or not, you need to follow it. Monitor the financial statements and see if the company's business data, EPS has maintained with an unusual up and down frequency.
Conclude
Above is our answer on what the P/E ratio is and related information. Hopefully, the article will help investors have more knowledge to apply as well as good enough psychology to make the most reasonable investment choice.
To update more knowledge and investment terms, you can refer to https://finnews24.com/ .
