The Price Earnings Ratio, also known as PER, is a powerful tool used by investors to evaluate a company’s stock. The PER is a ratio of a company’s stock price to its earnings per share (EPS). It is calculated by dividing the market price per share by the EPS. The PER is widely used as an indicator of a stock’s value, and can provide investors with insight into the profitability and growth potential of a company.
In this article, we will explore how the PER is calculated and how it can be used to evaluate a company’s stock. We will also look at the factors that can influence a company’s PER and how it can be used to compare stocks across different sectors.
What is the PER?
The PER is a ratio used to measure the relative value of a company’s stock. It is calculated by dividing the market price per share (MPS) by the earnings per share (EPS). The result of this calculation is referred to as the PER.
For example, if a company has an MPS of $30 and an EPS of $2, the PER would be 15 ($30 divided by $2). This means that for every dollar of the company’s earnings, investors are willing to pay $15.
The PER is a useful tool for investors as it provides a quick and easy way to compare the relative value of stocks across different sectors. It is also a useful indicator of a company’s profitability and growth potential.
Factors that Influence the PER
There are several factors that can influence a company’s PER. These include the company’s earnings, its outlook for future growth, the size of its industry, and the overall sentiment in the market.
Earnings: The PER is directly influenced by the company’s earnings. Companies with higher earnings will generally have higher PERs, as investors are willing to pay more for their stock. Conversely, companies with lower earnings will generally have lower PERs, as investors are less willing to pay as much for their stock.
Growth Outlook: The PER is also affected by a company’s outlook for future growth. Companies with a positive outlook for future growth will generally have higher PERs, as investors believe that their stock will increase in value over time. Conversely, companies with a negative outlook will generally have lower PERs, as investors are less willing to invest in them.
Size of Industry: The size of a company’s industry can also influence its PER. Companies in larger industries will generally have higher PERs, as they are more likely to benefit from economies of scale. Conversely, companies in smaller industries will generally have lower PERs, as they are less likely to benefit from economies of scale.
Overall Market Sentiment: The overall market sentiment can also affect a company’s PER. When the overall market is optimistic, companies will generally have higher PERs, as investors are more willing to invest in them. Conversely, when the overall market is pessimistic, companies will generally have lower PERs, as investors are less willing to invest in them.
How to Compare Stocks Using the PER
The PER is a useful tool for comparing stocks across different sectors. Investors can use the PER to compare the relative value of different stocks and determine which ones are more attractive investments.
The PER is calculated by dividing the MPS by the EPS. To compare stocks across different sectors, investors can use the following formula:
Company A’s PER/Company B’s PER = Company A’s MPS/Company B’s MPS
For example, if Company A has an MPS of $30 and an EPS of $2, and Company B has an MPS of $60 and an EPS of $4, the ratio would be 1:2. This means that for every dollar of Company A’s earnings, investors are willing to pay $30, while for every dollar of Company B’s earnings, investors are willing to pay $60.
Conclusion
The PER is a powerful tool used by investors to evaluate a company’s stock. It is calculated by dividing the market price per share by the earnings per share and provides investors with insight into a company’s profitability and growth potential. The PER is also useful for comparing stocks across different sectors, as it provides a quick and easy way to compare the relative value of different stocks.