WELCOME

PRICE-EARNING
RATIO
Presented by
Group - 7
 MEANING

Ratio between Stock-price & EPS

FORMULA=MARKET
MARKET VALUE PER SHARE
EARNING PER SHARE (EPS)
=MARKET CAPITALISATION
PROFIT AFTER TAX (PAT)
 Illustration

The Capital of Star co Ltd. is as follows

80,000 Equity Share of Rs.10 each Rs 8,00,000

9% 30,000 Preference Share of Rs 10 each
Rs 3,00,000

The following information has been
obtained from the books of Company

PAT Rs2,70,000

Market Price of Equity Share Rs40

EPS=Profit after tax & Preference dividend
No. of Equity Shares
=2,43,000
80,000
=3.04

P/E Ratio =Market Price of Equity Share
No. of Equity Shares
=40
3.04
=13.1 : 1
 FEATURES

Capital Market Ratio

Indicates Investor’s
Expectation

Three types of P/E

Expressed in term of
“times”
 TYPES

Trailing P/E

Trailing
P/E from continued
operations

Forward or Estimated P/E

 INTERPRETATION

N/A

A company with no earnings has an undefined P/E ratio. By
convention, companies with losses (negative earnings) are usually
treated as having an undefined P/E ratio, although a negative
P/E ratio can be mathematically determined.

0–10

Either the stock is undervalued or the company's earnings are
thought to be in decline. Alternatively, current earnings may be
substantially above historic trends or the company may have
profited from selling assets.

10–17

For many companies a P/E ratio in this range may be considered
fair value..
Contd…...

17–25

Either the stock is overvalued or the company's
earnings have increased since the last earnings figure
was published. The stock may also be a growth stock
with earnings expected to increase substantially in
future.

25+

A company whose shares have a very high P/E may
have high expected future growth in earnings or the
stock may be the subject of a speculative bubble.
 USES

Investor’s guide

Decision Making

Fixing Swap Ratio

Calculating Earning Yields
 LIMITATION

Can Mislead

Can’t be used in isolation

Not full-proof

Fluctuates too often