September 19, 2024
PE Ratio Explained Simply | Finance in 5 Minutes!
 #Finance

PE Ratio Explained Simply | Finance in 5 Minutes! #Finance


interested in learning about price to earnings ratio this metric also known as p e ratio gives investors a quick Valuation of a stock it’s a very common metric that helps you understand if the company is currently over or undervalued in the market hey welcome to

reinance the channel centered around your financial education to help make you a better investor be sure to subscribe to the channel as i upload new educational Stock Market CashNews.cos every week p e ratio is a Valuation metric that compares the stock’s

current price to its earnings or Profit it tells you how much of a premium you are currently paying in order to gain exposure to that company’s Profits the price to earnings ratio can be used to help understand whether the market is currently placing a high

or low price on that stock based on how much money and Profits the company is generating in general stocks with a low p e ratio something around 10 would imply the stock is currently cheap whereas stocks with a high p e ratio say 50 or greater implies the price is currently

expensive relative to the Profit that it makes let’s have a look at how you can calculate the p e ratio the formula is the price per share divided by the earnings per share if you haven’t already seen my CashNews.co on earnings per share or eps you can check out the

link to the CashNews.co on screen now to get a better understanding of earnings per share the output from the p e ratio calculation will result in what’s called a multiple something like 20 times if you ever hear somebody referring to a stocks multiple or earnings multiple this is what they

are talking about so now let’s do a quick example here a hypothetical company bill’s bike shop currently has a stock price of 60 per share and has an earnings per share of three dollars to find the p e ratio we divide sixty dollars by three dollars to find the bill’s bike shop has

a price to earnings ratio of 20 times what this is telling us is that the market is currently valuing the Shares of bill’s bike shop at 20 times the amount of their yearly Profit so if you were to buy Shares in bill’s bike shop you

would be paying 20 times the amount that they generate in Profit for the year this ratio also implies that it would take 20 years at current price and Profit levels for bills bike shop to make enough money to pay back all the shareholders in full for their

Shares p e ratio really shows its strength when you use it to compare different companies within the same industry to get a better idea of how each company is being valued let’s compare two companies here bill’s bike shop and sam scooter company both of which provide

alternative means to transportation so we can consider them to be in the same industry from before we already know that bill’s company has a price per share of sixty dollars and an earnings per share of three dollars giving us a p e ratio of 20 times now for sam scooter company they currently

have a price per share of 75 with an earnings per share of five dollars you may be inclined to think that bill’s bike shop is a better value because the share price is only 60 versus the 75 dollars for sam scooter company but share price alone does not tell the full story when we calculate

the price to earnings ratio for sam scooters we find that the stock has a p e ratio of 15 times so what’s going on here even though sam scooters has a higher price per share they are also generating more earnings for the Shares outstanding what we see is that when we compare

the two companies and in apples to apple sense with p e ratio we find that sam Shares are actually a better value since the company is more Profitable even though sam’s scooter Shares are 15 more expensive they actually give you the right to

more Profits than bill’s bike shop does you have the right to five dollars per share with a Profit instead of only the three dollars per share in Profit the bills bike shop offers this is really the key to understanding what p e ratio tells

us you should know that the price to earnings ratio is really only useful when comparing companies within the same industry as different Industries will have different standards when it

comes to p e ratio it would not make sense to compare mcdonald’s p e ratio to amazon’s p e ratio for example this is because expectations and growth rates within the restaurant sector like mcdonald’s are very different than the expectations for a technology company like amazon

mcdonald’s might see more consistent Profits but at a lower growth rate whereas amazon’s Profits are expected to grow much faster but have the potential for volatility it would be a much better idea to compare amazon’s p e ratio to another tech

company like apple to get an idea on the Valuation of each of those companies with that being said remember that using p e ratio for comparison is really only useful for companies that operate in similar #1a73e8; text-decoration: none;">Markets and similar Industries finally let’s have a look at where we can find p e ratio without doing any of the math my go-to source for stock

information is yahoo Finance but you can use whichever platform you like best we have mcdonald’s stock here on yahoo

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and we want to look at the financial metrics section to the left of the chart we can see that p e ratio is listed here telling us that mcdonald’s stock currently has a p e ratio of about 37 so if you were

to buy mcdonald’s stock today the stock price would be 37 times larger than the amount of Profit that the company makes thanks for watching today how do you use pe ratio to evaluate a company let me know your process in the comments below you can check with the playlist on

screen now for more educational CashNews.cos like this one if you found the CashNews.co helpful give it a thumbs up and as always subscribe for more and i’ll see you in the next one

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40 thoughts on “PE Ratio Explained Simply | Finance in 5 Minutes! #Finance

  1. I've owned NVDA for over 8 years. It's been up and down, but I believe in Jensen Huang and will stick with NVDA until Jensen says otherwise. I know that sounds crazy, but when the financial statements/Jensen, (same to me) tell me to sell, I will. I'm sure I won't sell at the top, but that's OK.

  2. Its worse here, our economy is like a flailing fish, fighting for its life. The normal state of the U.S. economy is actually very bad. Because of this it goes into convulsive spasms fighting to grow any way it can out of desperation. Tricks, gimmicks, rule changes try to stimulate the economy and prevent it from falling but they only bring temporary relief to people since, when you factor in inflation we are declining.

  3. Pe ratio is a misleading metric for trading. Market is driven by emotions not by pe ratio.
    If there's no demand for a stock it is useless no matter how good the pe ratio is
    Eg. Alibaba

  4. I hope you correct me of i were wrong but isnt apple and amazon very different businesses?

    Apple develops gadgets like iphones, wile amazon is some kind of an online platform..

    Shouldnt apple rather be compared to companies like samsung or huawei?

  5. Every week I buy more of whatever is the lowest percentage of my portfolio and try to keep everything around 10%. Please what could be my safest buys with $400k to outperform the market in 2024?

  6. Hi! It's good to evaluate individual companies/stocks. but could we use P/E ratio to evaluate index fund or ETF performance? like VOO vs IVV would be the same coz they both track S&P 500. — but how about comparing VOO vs QQQ (tracking the Nasdaq 100). TQ

  7. I’m a god of devaluation, I buy a stock and it goes down! Why I can't make earnings is beyond me. It can be annoying how volatile the market is. How can I ride this fresh wave of all-time highs without getting burned again with 450k set aside to get fully invested this year?

  8. If Bill's bike shop are electric bikes and Bill would probably want you to classify him as a tech company and thus this example would be complete nothing Burger.

  9. This is quite educational. It's crucial for newcomers to keep in mind that the financial markets are highly irrational in the short run. You should constantly be ready for the unexpected. That is how chance operates. Because of the inherent risks in the market, I always favor long-term investments.

  10. Thank you I’m new to investing and I’ve been trying to understand P/E ratio. After reading many lengthy articles, without having a clear idea, I happen across your video, and I have a better grasp of the subject. You earned a new subscriber, and I look forward to studying with you

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