Question

Profitability Ratios, Im having understanding the price to earnings ratio,

Can you explain the Price to earnings Ratio?

What does it mean when the price to earnings ratio is 10?

What does it mean that a company is overvalued or undervalued and how do you determine that?

Answer 1

PRICE TO EARNING RATIO

Price to earning ratio is a ratio that is used to valuaing a company that measure it current share price relative to its per share earnings . These ratio are used by investors and analysts to determine relative share value of company . The following is the formula for price to earning ratio .

Price to earnings ratio = market value per share / earnings per share

* price earning ratio of 10 is indicates that stock price 10 time greater than its earnings. A high price to earnings ratio means stock price is high relative to earnings. Lowest price to earning means that stock price is low relative to its earnings.

Ways to know company stock is overvalued or undervalued

1 price to earning ratio and earning yield ratio

These ratio are used to valuing a company relative by the measure of its current price per share relative to its earnings per share .

2 price to book value ratio

Price to book value ratio is very handy approach to finding undervalued or overvalued stock . It is also used to evaluate a company for valuations.

P/b ratio = stock price / (total assets - total liabilities)

3 Ev / EBITDA as a valuation measure

EBITDA is a valuation measure to gauge stock undervalued when a company is being merged or acquired .

The above are the detailed explanation

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