Vlad RF
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What is P/E, and How to Use It for Assessing Stocks?
Author: Victor Gryazin
Dear Clients and Partners,
Before choosing stocks or packages of stocks for investments, investors study the charts and reports of companies but often miss an important coefficient/index – P/E (Price/Earnings). Let us try to find out what is this index and how we can use it.
What is P/E?
P/E is a multiplier used for checking if a company is overpriced or underpriced and shows its primary investment attractiveness for investors. Based on P/E, you can conclude how fast your investments in a company will pay off.
How P/E is calculated?
P (Price) is the company’s capitalization or, in other words, its exchange price. It is calculated by multiplying the price of one stock by the whole number of stocks in circulation.
For example, the X company has 1 million stocks in circulation; the current stock price is 2 USD. This means the company’s capitalization is 2 million USD.
E (Earnings) is the company’s net profit for the reporting period. Normally, for calculations, we use the data for the last calendar year. Also, in certain cases, we use the forecast profit that the company will receive in the future or sliding profit. Note that sometimes this index is overstated to make the company more attractive, but later, it might decline. To put it simply, P/E tells us how long it will take your investments to pay back.
The lower the index, the sooner it will happen.
However, things are not as simple as they seem. A low P/E value means that the company is underpriced, and its stocks will be moving towards a fair price, which will make the earnings of the investor in the long run. On the other hand, low P/E might mean some negative background or serious problems in the company.
A P/E value higher than the market average means that the company is overpriced, so investments in it might not pay back in the medium or long run.
3 ways of calculating P/E:
Yearly P/E: in the new 2021, we calculate P/E based on the profit and stock rice in the previous 2020.
Sliding P/E: at the end of Q1, 2021, we form P/E based on three quarters of 2020 and the first quarter of 2021.
Forward P/E: at the beginning of Q4, 2021, we forecast P/E. The values of Q4, 2020 will be nonobjective due to the change in market conditions. Based on preliminary calculations and forecasts, we calculate the multiplier for the next quarter. The calculation will be conditional, however, it will show some perspectives of the company and make some forecasts.
How to use P/E?
To realize the perspectives of investments in a certain company, it is not enough just to know its P/E. You need to compare it with other indices as well.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team
Author: Victor Gryazin
Dear Clients and Partners,
Before choosing stocks or packages of stocks for investments, investors study the charts and reports of companies but often miss an important coefficient/index – P/E (Price/Earnings). Let us try to find out what is this index and how we can use it.
What is P/E?
P/E is a multiplier used for checking if a company is overpriced or underpriced and shows its primary investment attractiveness for investors. Based on P/E, you can conclude how fast your investments in a company will pay off.
How P/E is calculated?
P (Price) is the company’s capitalization or, in other words, its exchange price. It is calculated by multiplying the price of one stock by the whole number of stocks in circulation.
For example, the X company has 1 million stocks in circulation; the current stock price is 2 USD. This means the company’s capitalization is 2 million USD.
E (Earnings) is the company’s net profit for the reporting period. Normally, for calculations, we use the data for the last calendar year. Also, in certain cases, we use the forecast profit that the company will receive in the future or sliding profit. Note that sometimes this index is overstated to make the company more attractive, but later, it might decline. To put it simply, P/E tells us how long it will take your investments to pay back.
The lower the index, the sooner it will happen.
However, things are not as simple as they seem. A low P/E value means that the company is underpriced, and its stocks will be moving towards a fair price, which will make the earnings of the investor in the long run. On the other hand, low P/E might mean some negative background or serious problems in the company.
A P/E value higher than the market average means that the company is overpriced, so investments in it might not pay back in the medium or long run.
3 ways of calculating P/E:
- Yearly (normal) is the P/E of the previous calendar year.
- Sliding P/E is the P/E of the previous four quarters, regardless of the quarter when it is calculated.
- Forward P/E is forecast P/E. The calculation is made at the beginning of the fourth quarter – for the future.
Yearly P/E: in the new 2021, we calculate P/E based on the profit and stock rice in the previous 2020.
Sliding P/E: at the end of Q1, 2021, we form P/E based on three quarters of 2020 and the first quarter of 2021.
Forward P/E: at the beginning of Q4, 2021, we forecast P/E. The values of Q4, 2020 will be nonobjective due to the change in market conditions. Based on preliminary calculations and forecasts, we calculate the multiplier for the next quarter. The calculation will be conditional, however, it will show some perspectives of the company and make some forecasts.
How to use P/E?
To realize the perspectives of investments in a certain company, it is not enough just to know its P/E. You need to compare it with other indices as well.
Read more at R Blog - RoboForex
Sincerely,
RoboForex team