The PE is the most common measure of valuing stocks and understanding it’s use is critical to successful investing. It is computed by dividing the price of a stock by the earnings for each share.
This is important since various companies have different earnings and number of issued share. Why is the measure important? Investors are buying an intangible which is future income, the PE tells how many years of profit or earnings investors have price into a company’s stock. For example, take the hottest stock around now – NCB Financial, this publication projects the group to generate earnings next year of $17.5 billion after tax or $12.50 per share. Based on the above price, the stock now sells for 12.7 times 2019 earnings. If the profit stagnates at these levels then it will take 12.5 years to recover an investment in the stock assuming all profits were paid out to shareholders.
Investors will compare this PE ratio of 12.7 with the overall market which is now at 16 as well as against other stocks. If other stocks are selling below the value of NCB then it may be better to go after those, all things being equal, they should provide a better return on investments.
While the PE is best used in the stock market it can be used in the money and real estate markets as well.
PE ratio most critical investment tool
December 1, 2018 by
