Investing in the stock market can be very complicated if you are just starting out. There are various topics that can be studied before you try to choose and buy shares. One of them is knowing the meaning of Price Earning Ratio (usually also abbreviated as PER).the concept of Price Earning Ratio can be a little confusing but once you know the simple formula for calculating it, everything will be easy. So let's get started!
Definition of Price Earning Ratio (PER)
Price to earnings ratio or Price Earning Ratio in terms of stock market investment is the ratio between the price of a stock relative to earnings per share, or EPS.in other words: Price Earning Ratio = Share Price divided by Earnings Per Share (EPS). EPS or Earning Per Share is earned through the last four quarters of the company. How to calculate EPS is income divided by the number of shares outstanding.
Types of Price Earning Ratio
There are two common types of price to income ratios.Price Earning Ratio is lagging and the ratio of Price Earning Ratio is projected or continued. The remaining Price Earning Ratio is the current actual Price Earning Ratio. This takes into account the share price and EPS of the last four quarters of a particular company.
Whereas the projected or continued Price Earning Ratio is more the predicted Price Earning Ratio.instead of using EPS from the last four quarters, earnings for the next four quarters are analyst estimates.This EPS estimate is then taken into account when determining future Price Earning Ratio.
How to Use Price Earning Ratio When Investing
Price Earning Ratio is only one aspect, however, to truly understand the value of a particular stock, many aspects must be considered before deciding whether the stock is worth buying or not, as I once wrote in the article How to Select Stocks for Investment.however, Price Earning Ratio can function as a quick glance at the company's finances without too deep learning.
A high Price Earning Ratio usually means that investors expect higher returns from the company. If we think about the formula again, a high Price Earning Ratio means that the share price is much higher than its income.This could be because there may be many investors who want to put their money in the stock. However, that is not always the case, there may be other reasons.one of them might be that shares might be overvalued or their income isn't too high.
Low Price Earning Ratio generally means that the company has improved from the previous performance or at this time the stock is considered low or cheap. Again, this may not always be true but this is a common way to look at it.now you can use Price Earning Ratio to help you invest better in the stock market. But, there are certain things you should pay attention to when looking at Price Earning Ratio.
Price Earning Ratio can be very different between two stocks in different sectors. That does not mean that one of the stocks is good or bad.You cannot compare two stocks that are in completely different sectors. For example, comparing shares in the technology sector with shares in the oil sector.
Usually a stock is considered cheap (undervalued) if it has a small PER under 10 or 15.to screen stocks based on PER and other fundamental ratios, you can use free screening fit provided by IPOT.