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Price Earning Ratio (PE)
You can calculate the PE ratio by dividing the price of shares by earnings per
share (EPS). The PE ratios are easily available in our daily newspapers.
PE Ratio = Share price
EPS
For example, a stock, W, is priced at RM10 a share, and its earnings per share
over the past year were RM1, its PE ratio will be 10 (10 divided by 1). But
what does that mean to you?
In this example, if W continues to make the same level of earnings, it will take
ten years for you to recoup your RM10 a share from the company’s earnings.
Another stock, S, is priced at RM20 a share, and its EPS over the year was
RM4, its PE ratio will be 5 only. It will take shorter time to recoup your
capital compared to W.
Hence, the lower the PE ratio, the more attractive the stock is, as it means
shorter time period to recoup your investment. Another good thing about
low PE stocks is that during stock market crashes, these low PE stocks are
more resilient too.
However, it will be more meaningful if you compare the PE ratios within the
same industry to see if the stock is overpriced. Sometimes high PE ratio does
not mean the stock is expensive, because the stock may have high growth
prospects in its future earnings, so investors snap up the shares in anticipation
of the future. This is especially true for the tech stocks.
share (EPS). The PE ratios are easily available in our daily newspapers.
PE Ratio = Share price
EPS
For example, a stock, W, is priced at RM10 a share, and its earnings per share
over the past year were RM1, its PE ratio will be 10 (10 divided by 1). But
what does that mean to you?
In this example, if W continues to make the same level of earnings, it will take
ten years for you to recoup your RM10 a share from the company’s earnings.
Another stock, S, is priced at RM20 a share, and its EPS over the year was
RM4, its PE ratio will be 5 only. It will take shorter time to recoup your
capital compared to W.
Hence, the lower the PE ratio, the more attractive the stock is, as it means
shorter time period to recoup your investment. Another good thing about
low PE stocks is that during stock market crashes, these low PE stocks are
more resilient too.
However, it will be more meaningful if you compare the PE ratios within the
same industry to see if the stock is overpriced. Sometimes high PE ratio does
not mean the stock is expensive, because the stock may have high growth
prospects in its future earnings, so investors snap up the shares in anticipation
of the future. This is especially true for the tech stocks.
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