P/E Ratio stands for Price Earnings Ratio and represents "how many times the company's stock price is relative to its Earnings Per Share (EPS)." It is an indicator that compares stock price value with net profit (corporate profitability).
Price Earnings Ratio, or P/E Ratio, is an indicator that shows how many times a company's stock price is relative to its earnings per share (EPS).
In this article, we will explain the benchmark for P/E Ratio, its calculation formula, and key considerations.
What is P/E Ratio (Price Earnings Ratio)
P/E Ratio stands for Price Earnings Ratio.
It represents "how many times the company's stock price is relative to its earnings per share (EPS)". It is an indicator that compares stock price value with net profit (corporate profitability).
Generally, a high P/E Ratio suggests that a stock is "overvalued," whereas a low P/E Ratio indicates it is "undervalued."
The calculation formula for Price Earnings Ratio
The formula for calculating the P/E Ratio is as follows:
P/E Ratio = Stock Price / Earnings Per Share (EPS)
Example calculation of P/E ratio
For instance, if Company A's stock price is 10 SGD and its EPS is 1 SGD, the P/E Ratio would be 10.
If Company B's stock price is 10 SGD and its EPS is 2 SGD, the P/E Ratio would be 5.
Comparing the two, Company B, which has higher earnings per share, appears to have a more undervalued stock price than Company A.
Insights from P/E ratio
P/E Ratio indicates how much the stock price is valued in relation to EPS and how actively it is being traded in the stock market.
Generally, companies with high growth expectations tend to have higher P/E Ratio values, whereas more stable companies tend to maintain a lower, stable P/E Ratio.
It is necessary to compare P/E Ratio with industry peers and analyse historical trends to determine whether the current P/E Ratio is high or low.
Key considerations regarding P/E ratio
There are two key points to keep in mind when evaluating P/E Ratio:
P/E Ratio comparison within the same industry
Since revenue structures and growth potential vary across industries, P/E Ratio is typically compared within the same industry.
For example, companies in the IT sector, which tend to experience growth, often have higher P/E Ratios, whereas those in stable industries like banking typically have lower P/E Ratios.
It is also important to consider company size and future potential.
P/E ration should not be evaluated in isolation
Even if the P/E Ratio is low, factors such as fluctuations in corporate performance or changes in the industry environment may cause this figure to be temporary.
Therefore, it is advisable to use P/E Ratio alongside other indicators, such as ROA (Return on Assets) and ROE (Return on Equity), for a more comprehensive analysis.
