What is PE Ratio? PE Ratio is a financial metric that gives an idea about "what an investor is a ready pay to buy a share of a company based on earnings of the company' For example, if the PE ratio is 20, which means the investor is ready to pay 20 times of company's EPS per-share earning to buy a stock. Forward PE Ratio? How to Analyze PE Ratio? Share This Article. Share 0. Tweet 0.
Pin 0. Abhishek Vyas. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. The high multiple indicates that investors expect higher growth from the company compared to the overall market. For example, if earnings are expected to rise, investors might expect the company to increase its dividends as a result.
Higher earnings and rising dividends typically lead to a higher stock price. In other words, earnings per share is the portion of a company's net income that would be earned per share if all the profits were paid out to its shareholders. EPS is used typically by analysts and traders to establish the financial strength of a company. In other words, the bank was trading at roughly nine times earnings.
However, the 9. As stated earlier, to determine whether a stock is overvalued or undervalued , it should be compared to other stock in its sector or industry group.
Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services. In most cases, an industry group will benefit during a particular phase of the business cycle. Therefore, many professional investors will concentrate on an industry group when their turn in the cycle is up.
As economies mature, inflation tends to rise. As a result, the Federal Reserve increases interest rates to slow the economy and tame inflation to prevent a rapid rise in prices.
Certain industries do well in this environment. Banks, for example, earn more income as interest rates rise since they can charge higher rates on their credit products such as credit cards and mortgages.
Basic materials and energy companies also receive a boost to earnings from inflation since they can charge higher prices for the commodities they harvest. Conversely, toward the end of an economic recession, interest rates will typically be low, and banks typically earn less revenue. However, consumer cyclical stocks usually have higher earnings because consumers may be more willing to purchase on credit when rates are low. On the other hand, determining an appropriate earnings number can be more difficult.
Investors must determine how to define earnings and the factors that impact earnings. Those limitations include:.
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