armember-membership domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114ARMember domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/wanrru6iyyto/public_html/wp-includes/functions.php on line 6114Price to Earnings Ratio (P\/E) is an analysis tool used to evaluate publicly traded<\/span> stock<\/a><\/strong><\/span>. It is a simple mathematical formula relating the stock price in the market against the prior 12 months of earnings. The following is the formula:\u00a0<\/span><\/span><\/p>\n Price to Earnings Ratio = Current Stock Price in the Market\/Prior 12 Months of Earnings per Share\u00a0<\/span><\/span><\/p>\n It is most commonly used by investors (buyers of stock) to determine the likelihood that the current trading price of the stock is beneficial or detrimental to the buyer. Historical trigger points to investing in the stock have been ratios of 19 or less. As an example, if the current price of the stock is $81 then to have a ratio of 19 or less, the earnings would have to have been $4.26 or more during the previous 12 months.\u00a0<\/span><\/p>\n P\/E ratio of 19 = $81 Current Stock Price\/Unknown As a buyer, the lower the P\/E the more beneficial the opportunity to purchase the stock. If you are selling stock, the higher the P\/E the greater the opportunity to make money. How so?\u00a0<\/span><\/p>\n As a company earns money it has to utilize those earnings in some fashion. It may distribute the earnings to the shareholders via<\/span> dividends<\/a><\/strong><\/span> or retain the money to continue expansion of operations or reduce<\/span> debt<\/a><\/strong><\/span>.\u00a0 Most commonly, both are exercised with earnings. Most companies will pay some of the earnings out as dividends<\/span><\/strong><\/a> and retain the balance to benefit the corporate financial situation. As a buyer of stock, you are interested in your investment having the maximum earnings per share of stock. Evaluate the most recent history of this criterion, the price to earnings ratio is your best tool. As the P\/E decreases, it means that the price on the market per share is more valuable because there are greater earnings per share in comparison to the market price. The following chart illustrates this relationship:<\/span><\/span><\/p>\n Per Share Earnings<\/span><\/strong>\u00a0\u00a0<\/strong>\u00a0Stock Price<\/span><\/strong>\u00a0 \u00a0P\/E Ratio The chart illustrates that as the earnings remain the same, as the share price decreases, the P\/E ratio also decreases. Therefore when evaluating stock, the lower the P\/E, the stock becomes increasingly more valuable as a buy.\u00a0<\/span><\/p>\n Naturally as an investor in stock, you desire to buy low and sell high. The higher the price to earnings the less likely other investors will desire to purchase the stock. However, it doesn\u2019t mean that someone isn\u2019t going to buy the stock; it just means there are fewer buyers in the market. Therefore, as the P\/E begins to increase the stronger the impetus to sell the stock.\u00a0<\/span><\/p>\n As a student of investing, this tool is merely a relationship formula. It doesn\u2019t mean that you base your buying and selling on just this analysis. The following explains this concept in more detail.\u00a0<\/span><\/p>\n In the traditional stock purchase and sell relationship, the buyer buys low and sells high. If you transfer this relationship and based it solely on the price to earnings ratio, you may not make a return on your investment.\u00a0 Suppose you purchase a share of Company \u2018A\u2019 for a P\/E ratio of 16 for a price of $38. This means that Company \u2018A\u2019 earned $2.38 per share during the prior 12 months. In keeping with your only criterion of the P\/E as the determining factor in buying and selling, let\u2019s say the new P\/E is 19. You want to sell at 19 after buying at 16.\u00a0\u00a0<\/span><\/p>\n There may be a problem. If the earnings have dropped to half of the earnings when you purchased the stock, this means that based on the P\/E you are selling the stock for $22.61. The following chart illustrates the relationship:\u00a0<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Per Share\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 .<\/span> Notice your sole criterion of only trading based on the Price to Earnings Ratio. You buy low and sell high. In this case you would lose $15.39 per share. The key to this ratio is that it only reflects the most recent 12 month period of activity and therefore it should not be your only tool in determining the buy and sell points.\u00a0<\/span><\/p>\n What is really interesting about the price to earnings ratio is that it has more negative attributes than positive attributes. How can this be? After all, every market guru uses the term frequently and actually they throw it out there like it\u2019s the only form of evaluating stock. Well let me explain.\u00a0\u00a0<\/span><\/p>\n The primary purpose of the tool is to evaluate the price of the stock to the most recent four quarters of earnings. This is the most positive attribute of the P\/E ratio. In more advanced terminology this is referred to as the trailing price to earnings ratio. However, some market analysts will use the term \u2018leading price to earnings ratio\u2019. This means that they are changing the earnings amount to the expected amount over the next four quarters.\u00a0 Ooh\u2026, notice now that the value is becoming riskier in nature because the formula is using expected earnings. Often, market analysts overestimate the potential earnings; therefore the leading P\/E is overstated. This is a negative attribute related to using this formula in evaluating your purchase or sale of the stock.\u00a0<\/span><\/p>\n
\n<\/span>Solve for the unknown:\u00a0 19 = 81\/X
\n<\/span>Therefore:\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 19\/81 = 4.26\u00a0<\/span><\/span><\/p>\nPrice to Earnings Ratio – Purchasing Stock in the Market<\/span><\/strong><\/h2>\n
\n<\/span><\/strong><\/span>\u00a0 \u00a0 \u00a0 \u00a0$2.71 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $62.33 \u00a0 \u00a0 \u00a0 \u00a0 \u00a023
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a02.71 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 53.85 \u00a0 \u00a0 \u00a0 \u00a0 \u00a019.87
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a02.71 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 46.50 \u00a0 \u00a0 \u00a0 \u00a0 \u00a017.16
\n<\/span>\u00a0 \u00a0 \u00a0 \u00a0 \u00a02.71 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 38.00 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 14.02\u00a0<\/span><\/span><\/p>\nPrice to Earnings Ratio – Selling Stock in the Market<\/span><\/strong><\/h2>\n
\n<\/span><\/strong><\/span>Earnings<\/span><\/strong>\u00a0 <\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Stock Price<\/span><\/strong>\u00a0\u00a0\u00a0\u00a0\u00a0 P\/E Ratio
\n<\/span><\/strong><\/span>\u00a0 $2.38\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $38.00 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a016
\n<\/span>\u00a0 \u00a0 1.19\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 22.61 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a019\u00a0<\/span><\/span><\/p>\nPrice to Earnings Ratio – Historical Evaluation Tool<\/span><\/strong><\/h2>\n
Price to Earnings Ratio – Industry Comparison<\/span><\/strong><\/h2>\n