Price Earning Ratio
The Price earning ratio is generally called as Price / Earning ratio or P/E ratio is another ratio that is of particular interest to the investors in the public business. The profit earning ratio provides the investors an idea of how much he or she is paying in the current price for stock and shares for every dollar of earnings (i.e. the net income being earned by the company). Keep in mind that earnings hold up the market value of the stock and shares.
Financial analysts often compare earning per share amounts with the market price of the stock. They usually express this comparison as price earning ratio (= market price per share divided by earnings per share). For example, the common stock of a business organization sold for 48 dollars per share on January 31, 2008, the company’s 2008 fiscal year end. The price earning ratio, often called the P/E ratio, is 15.1 (= 48 dollars/ 3.17 dollars) to 1. The analysts often express the relation saying.” The stock sells at 15.1 times earnings”.
Tables of stock prices and financial periodicals often present price earnings ratios. The analyst must interest these published price earning ratios cautiously, however. In case in which a firm’s net income includes unusual, nonrecurring gains and losses, the reader must ascertain whether the published ratio uses income only from recurring operations or final net income that includes unusual items in the denominator. To serve their intend purpose, price earning ratios should use normal, ongoing earnings data in the denominator.
Calculation of Price Earning Ratios is as Follows:
Current Market Value or Price of the Stock divided by Most recent trailing 12 months diluted EPS = Price earning ratios( current market price of the stock / most recent trailing 12 months diluted EPS = Price Earning ratios ).