Price Earnings Ratio
Price earning ration basically reflects about the future
growth of company. Healthy price earnings ratio indicates prospect future of
the company. However, Healthy P/E ratio is a subjective term and can only be
determined when comparative information is available. P/E Ratio is calculated
by the following equation
P/E Ratio =
Market Price/EPS
The concept
of P/E ratio in relation to growth is explained with following Example
Example of P/E Ratio
|
|
Company
A
|
Company
B
|
|
EPS
|
.2
|
.3
|
|
MKT Price
|
20
|
20
|
|
|
|
|
Calculate
& comment on P/E Ratio.
Solution
|
|
Company A
|
Company
B
|
|
EPS
|
.2
|
.3
|
|
MKT Price
|
20
|
20
|
|
P/E Ratio = MKT Price/EPS
|
=20/.2=100
|
=20/.3=66.66
|
Above
example show that Despite Company A has low earning per share but still
maintain the same price as company B. This is because of high P/E ratio (better
expectation of future growth)
