Question

As u know.today’s stock price is 39,the dividend is 1.2,payout ratio is 60,trailing 12M dividends per share is 1.4,next year the dividend is 1.55,payout ratio is 60.2 calculate the trailing P/E ratio and Forward P/E ratio.before you calculation?brifely explain the difference between the two kinds of P/E ratio.and u know the average industry average P/E ratio is 25,please compare this P/E ratio ,what conclusion u can get?

Answer 1

As we know P/E ratio = Price /earnings or simply market price/earnings or MPS/EPS also known as Price-earnings ratio among stock market analyst across the globe.

P/E ratio indicates how many times is the market price per share of the company as compare to earnings per share.

Always remember that lower the P/E ratio better it is for example P/E ratio is 5 or 100/20 it means company earns 20% of your investment means if you invest naturally you would pay market price of $100 per share for the dollar and if the company earns $20 per share means EPS = $20 therefore P/E = 100/20= 5 times now suppose had P/E ratio been 20 times here then company would have been earning only $5 per share and P/E would have been 100/5= 20 times and naturally more the EPS more are the chances of getiing a good dividend as dividend is paid out of earnings only.

Coming to the above question current price is 39 and DPS = 1.2 and payout ratio is 60% means if EPS is 100 DPS is 60 as payout ratio = DPS/EPS*100 hence if DPS = 1.2 then EPS = 1.2/60%= 2 and current P/E is 39/2= 19.50 times

Trailing 12 months DPS is 1.4 and payout ratio is again 60% hence EPS is 2.3334 hence trailing 12M P/E is 39/2.334= 16.71 times i assume above payout can be 60.2% as well as it is not written so i am solving using 60.2% as well at 60.2% EPS is 1.40/60.2%= 2.3255 and P/E is 39/2.3255= 16.77 times

similarly we can find future EPS and P/E ratio at 60% and 60.2% payout ratios

At 60% EPS is 2.5833 (1.55/60%) and at 60.2% EPS is 2.5747 and P/E at 60% payout is 39/2.5833= 15.09 times and at 60.2% it is 15.14 times

since industry P/E is 25 times we can conclude that this company is performing much better than the industry average as per indutry average if one invests 100 his company earns just 4 EPS and in all situations above our company P/E is lower so it is better.

The difference between the trailing P/E and forward P/E are as follows

The forward P/E calculates the price-to-earnings ratio that uses projected future earnings. The trailing P/E, which is the standard form of the price-to-earnings ratio, is calculated using recent past earnings.

When analysts talk about the P/E ratio, they commonly refer to the trailing P/E. It is calculated by dividing the current market value, or share price, by the earnings per share over the previous 12 months. This measure is considered the most reliable since it is calculated based on a company's actual performance. However, it may be a faulty estimate since a company's performance and profits typically change over time.

The forward P/E ratio differs by projecting, or estimating, a company's likely earnings per share for the next 12 months. The forward P/E ratio is favored by analysts who believe that investment decisions are better made based on estimates of a company's future rather than past performance. Estimates used for the forward P/E ratio can come from either a company's earnings release or from analysts.

It can be helpful to investors to consider both calculations of the P/E ratio. If an investor has noted the forward P/E ratio from the previous year, he can check to see how accurate the previous year's estimated P/E was based on the current P/E. Forward P/E calculations are also helpful in comparing the likely future performance of similar companies in the same industry.