If investors are excited about the prospects for a given company, they may be willing to accept a higher P/E ratio in order to buy its shares. This can be due in part to the consistency of earnings, the anticipation for increased earnings, and the industry group that each stock is in. For example, two companies may both report earnings of $2 per share, but the stock trading at $20 a share has a P/E ratio of 10 while the other trading at $30 a share has a P/E of 15. The stock's price falls (even though the earnings per share remains stable) and the P/E ratio moves lower.Īs a result of all this, companies and industry groups generating the same level of earnings per share can be awarded very different P/E ratios. The earnings per share (the "E" part of the equation) has remained at $5, but because of investors' optimism, the average P/E ratio rises from 16 to 20.Ĭonversely, when investors' perception of a stock worsens and they are looking to pay less for a dollar's worth of earnings, P/E contraction occurs. For example, let's say a stock that was trading at $80 per share is now $100 per share. Likewise, if a stock is trading at $20 a share and its earning per share are $2, then the stock is said to be trading at a P/E of 10 ($20/$2).Įnthusiasm on the part of investors can lead to P/E expansion-a period when investors' perceptions of a company improve, and as a result, they are willing to pay more for a dollar's worth of earnings. If a stock is trading at $20 per share and its earnings per share are $1, then the stock has a P/E of 20 ($20/$1). The P/E for a stock is computed by dividing the price of a stock (the "P") by the company's annual earnings per share (the "E"). Environmental, Social and Governance (ESG) Investing.Bond Funds, Bond ETFs, and Preferred Securities.ADRs, Foreign Ordinaries & Canadian Stocks.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |