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Price-to-Earnings (P/E) Ratio

A quick glance at the information listed about particular stocks on a stock exchange will show you that the price-to-earnings ratio (P/E) is considered one of the most important. Financial analysts rely on the P/E ratio because earnings are what drive dividends and capital gains, and provide the fundamental value of a business.

The P/E ratio compares the market price of the stock to the earnings per share, or the total value of the equity outstanding to the total income after tax.



 

The P/E ratio fluctuates based on the market price of the stock. A high price to earnings ratio suggests that investors think the firm has high growth potential. That is, they will pay more for the share today relative to today’s earnings because they expect higher earnings in the future.  We often call P/E ratios multiples. We say that high-tech firms, those that have higher future potential earnings, trade at higher multiples, than low-growth firms like Xerox.

That being said, the P/E ratio is negatively correlated with the riskiness of a stock. An investor will want to pay less for a stock that has uncertain future cash flows than a stock that is guaranteed to make money. As a result, we pay less today for more risky stocks, and risky stocks should have a lower P/E ratio. This points out a trade off. Think of a lottery. It has a high risk – but a high future payoff if you win. On the other hand, stocks in a company, say Coca Cola, have a low risk but not as much growth. Their P/E ratio will reflect the trade off between risk and future returns. 

Stock, PE Ratio, ROE, Price/Book Value, & Profit Margin

GEC Corporation, which markets cleaning chemicals, insecticides and other products, paid dividends of $2.4 per share in 2006 on earnings of $4.00 per share. The book value of equity per share was $40.00. Starting from 2007 earnings are expected to grow 6% a year steadily and ROE will remain on the current level. The stock has a

Price to Earnings Ratio

Please compare CPI's current PE ratio to our competitors to see where we stand in the market. Compare with Proctor & Gamble, Johnson & Johnson and Colgate.

Earnings Per Share and Price Earnings Ratio

1. Burger Palace had earnings after taxes of $900,000 in the year 2009 with 301,000 shares outstanding. On January 1, 2010, the firm issued 32,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 28 percent. (a) Compute earnings per share for the year

Plot P/E on Excel

Follow one stock and record its price every day (Open, high, low, close), number of share traded, and its P/E ratio. Construct a chart of the above variables. Then use the and estimate its value and compare your estimated value with the market price of the stock. The number of share traded and P/E ratio should be recorded ea

Price Earnings Ratio in the United States

I need some help with the following case: Consider Pacific Energy Company and U.S. Bluechips, Inc both of which reported earnings of $750,000. Without new projects, both firms will continue to generate earnings of $750,000 in perpetuity. Assume that all earnings are paid as dividends and that both firms require a 14 percent r

Calculating price and price earning ratio in the given cases

Castles in the Sand generates a rate of return of 15% on its investments and maintains a plowback ratio of .20. Its earnings this year will be $2 per share. Investors expect a 12% rate of return on the stock. a. Find the price and P/E ratio of the firm. (Do not round intermediate calculations. Round your answers to 2 decim

Price earnings ratio using two different discount rates

No-Growth Industries pays out all of its earnings as dividends. It will pay its next $3 per share dividend in a year. The discount rate is 12%. a. What is the price-earnings ratio of the company? (Do not round intermediate calculations. Round your answer to 2 decimal places.) P/E ratio = b. What would the P/E rat

Murphy's, Inc: Balance in retained earnings after dividend; market price per share

10) Murphy's, Inc. has 10,000 shares of stock outstanding with a par value of $1.00 per share. The market value is $8 per share. The balance sheet shows $32,500 in the capital in excess of par account, $10,000 in the common stock account, and $42,700 in the retained earnings account. The firm just announced a 10% (small) stock d

Percentage Change in P/E Ratio

The following table shows the Price to Earnings ratio for a stereo equipment manufacturing between 1998 and 2002. Determine the percentage change in the P/E ratios from 1999 to 2000. Year P/E Ratio 1998 12.4 1999 14.6 2000 11.1 2001 8.2 2002 6.8 =

Financial and Ratio Calculations for Industrial Company #1 and #2

See attached file for proper format. Industrial Company #1 (in millions) 2008 2009 2010 Sales $4,250 $4,500 $4,750 Operating Income $400 $445 $480 Net Income $200 $225 $250 Current Assets $2,500 $2,750 $2,850 Current Liabilities $2,300 $2,450 $2,500 Shares Outstanding 100 100 100 Avera

Finn Resources Inc. EPS PE ratio Dividends per share Yield

The following information was taken from the financial statements of Finn Resources Inc. for December 31 of the current fiscal year; Common stock, $20 par value (no change during the year) $5,000,000 Preferred stock $10 Stock, $40 par (no change during the year) $800,000 The net income was $600,000 and the declared divid

Ratios used by Company's Financial Statements

Explain how ratios can be used to review a company's financial statements. Select a public company, and using price earning ratios, explain how the company is performing from a financial standpoint. Company picked: GE

Accounting Ratios: Earns per share, Price earning Ratio,

Based upon the following/attached information please review the attached ratio calculations. I am having difficulty identifying the specific items on the income statement related to the ratio calculations. Please determine the following ratios and explain your answers for review: 1. Earnings per share of common stock. 2.

Compare the ratio of the fundamental value per share that you computed in the previous question to Palm's market price per share (for February 23, 2001). 3. Compare Palm's market P/E on February 23, 2001, with the fundamental P/E you derive. 4. Analyze the approach that Palm's CFO took in trying to ascertain whether or not Palm was fairly valued in February 2001.

See attached worksheet. In 2000, the firm 3Com spun out its personal digital assistant division as Palm Inc. On February 23, 2001, the financial services firm Telerate reported the following information about Palm. The closing price for a share of Palm was $21.69. Palm had 565,946,000 shares outstanding. Its book valu

Price-Earnings Ratio for ABC, Inc.

ABC, Inc. has total assets of $642,000. There are 60,000 shares of stock outstanding with a market value of $19 a share. The firm has a profit margin of 6.4 percent and a total asset turnover of 1.36. What is the price-earnings ratio?

Price/Earnings ratio and managing earnings

1. The price/earnings ratio is often viewed as a measurement of future earning power. Do you agree? Why or why not? 2. Corporations have been criticized for "managing earnings." What does this mean? Do you agree that it is a problem? What can be done to prevent this practice?

Earnings and P/E ratio

Stock in Rich Corporation is currently selling for $25.00 per share. The firm's dividend yield is 10%. A. If the firm distributes 40% of its earnings, what are its earnings? B. What is the firms P/E ratio?

Expected sustainable growth rate, market P/E, price increase

Assume that the dividend payout ratio will be 55 percent when the rate on long-term government bonds falls to 9 percent. Since investors are becoming more risk averse, the equity risk premium will rise to 8 percent and investors will require a 7 percent return. The return on equity will be 13 percent. 1. What is the expecte

Dividend yield/P-E ratio

The stock of Pills Berry Company is selling at $60 per share. The firm pays a dividend of $1.80 per share. a. What is the annual dividend yield? b. If the firm has a payout rate of 50 percent, what is the firm's P/E ratio?

Manufacturing company's annual report

Find a manufacturing company's annual report. Calculate the following ratios for the company ( company selected below) selected: Return on Assets Return on Equity Gross Profit Margin Debt/Equity Ratio Debt Ratio Current Ratio Quick Ratio Inventory Turnover Total Asset Turnover Price Earnings Ratio Usin

Price to earnings ratio calculations

Foster Corp is considering the acquisition of Regis Corp. Foster has 2 million shares outstanding selling at $30 (or 7.5 times its earnings per share) Regis has 1 million shares outstanding selling at $15 (or 5 times its earnings per share) Fosters would offer to exchange 2 shares of Regis Corp. for 1 share of Foster Corp.

Please I need a step by step explanation for this problem

Use comparable firms for a PE analysis. Find three firms that can serve as comparables for COSTCO WHOLESALE CORPORATION to: Explain why you selected these firms. Explain why the comparable firms are not identical to your firm. Calculate and present the PE ratio for each of the comparable firms and Costco wholesale cor

Earnings per Share & P/E Ratio

Nanotech Inc. had earnings after taxes of $380,000 in 2007 with 300,000 shares of stock outstanding. The stock price was $40.80. In 2008, earnings after taxes increased to $420,000 with the same 300,000 shares outstanding. The stock price was $50.00. - Compute earnings per share and the P/E ratio for 2007. The P/E ratio equ

Calculating the P/E ratio

Rutland Corp's stock price at the end of last year was $30.25 and its earnings per share for the year were $2.45. What was its P/E ratio? 11.65 12.00 12.35 12.70 13.05