Monday, December 11

Fundamental Analysis Price to Earning Ratio (Pe Ratio)

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Stock investment analysis normally will include analysis on the price to earning ratio. Price to earning ratio is commonly known as PE ratio. PE ratio be obtained easily on the daily newspaper. The PE ratio on the daily newspaper is updated with the latest stock price. PE ratio is commonly used by investors as a guidance to look for undervalued stock.  

PE ratio is calculated using price per share divided by company earnings. Company earning can be obtained from the annual report of the company. If you do not know how to read the company annual report, then it would not be easy to get the value of company earning. So, another approach is to use price per share divided by earning per share (EPS) to obtain the value of PE ratio. Earning per share (EPS) can be obtained from online trading platform as well as the company annual report.

PE ratio is the fundamental of stock investment analysis. PE ratio is used as a reference of how many times of the stock price are we paying for the per share earning of the company. If PE ratio is 2, it means that we are paying 2 times more for the per share earning of the company.

Formula below is the PE ratio calculation formula:

PE Ratio = Price Per Share / Earning per share (EPS)

The example I included here is a simple and straight forward example to show you how to calculate PE ratio of a company. By referring to this example, it will help you better understand the PE ratio calculation.

Example:

You are looking at a stock called AAA stock. AAA stock is currently selling at RM 3.00 per share. From annual report, the earning per share (EPS) is RM 1.00.

Therefore, according to example above, the PE ratio is calculated as below:

PE ratio = 3.00 / 1.00 = 3.00

Thus, from PE ratio, we know that we are paying 3 times more to buy 1 unit of the company stock.

So, we should look for low PE ratio stock. A simple way to find whether a stock has low PE ratio is to compare the stock with other stocks in the same industry. For example, you can compare the PE ratio of stocks in banking sector and find the stocks with good performance and low PE ratio. If you manage to find a stock that has high earning per share with low PE ratio, then it would be a good stock to buy and invest for long term growth.

By buying stocks with low PE ratio, we are actually looking for the best deal in the stock market. This is because low PE ratio stocks are considered undervalue stocks. In longer period of time, the undervalued stock will at least reach the fundamental price.

It is crucial to do analysis before buying stocks. Do not invest in stocks without proper analysis.

My other articles on Stock Investments:

  1. Technical Analysis vs. Fundamental Analysisfor Stock Investment
  2. Basic of Fundamental Analysis Earning Per Share (EPS)
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