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.
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.
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