Info 1: price earning ratio definition
Info 2: how price earning ratio works
Info 3: price earning ratio vs debt ratio
Info 4: example of PE ratio
Opening information:
Price earning ratio breaks into three words price, earning, and ratio. Price means the amount, earnings means profits, and ratio means several times something more or less using computation.
The price-earning ratio means how many times each price is bigger or smaller than a profit amount. So now let’s have a look at what is a price-earning ratio, how the price-earring ratio works, and what is the difference between the price-earning ratio and debt ratio is. One brief example of the price-earring ratio.
Info 1: price earning ratio definition
Ottap is a shirt-selling company, which is already very popular among today’s youngsters. However any of the people who need to look to take great and beautiful shirts their children or son or husband or men would reach the Ottap.
Because Ottap is a public Industries that offers cheap and quality shirts for their all customers, their other competitors would able to offer the same quality and price.
That business stock market price was 256 dollars and each of the issued shares in the public market would be earning 3 dollars this year.
Therefore Jackson decided to invest and purchase more shares in the future period in the Ottap business, to find out how much stock Investors are paying for such an Industry in the public market.
By dividing the 256 dollars by an amount of eating of 3 dollars, he would be able to conclude that they are paying 85.3 times more money for each share earning or each dollar.
Here 85.3 is the price-earning ratio of the Ottap business, so let’s dive into how the price-earning ratio works in the public market.
Info 2: how to price earning ratio
The price earning ratio doesn’t represent any of the specific things or objects, instead, they are the amount of proportion to how many times such business earning amount goes into a Current market price.
For any of the public Corporations that had an earning share, how much amount such issued shares are paid by the stock market Invested is what is determined as a price-earning ratio.
Suppose any of the businesses that are not issued shares by not going public, where such business shares have no market price changes like a public business.
Using the market price of the one business Corporation and dividing the earning results, would answer how many times the stock Investor paying for each share’s earnings.
Clearly how much certain public Shares holders of Investors are paying for each dollar.
If the business had a huge price-earning ratio, it would have been paid more than the normal price of the earnings for each share, which means stock Investors are paying more money for a certain business than a standard amount.
For the clearance, some of the high net worth individuals would pay 5 times more money than the income or earning amount of such private business.
But when comes to public Corporations businesses get paid 100 times more money than their real earnings of one Industry. But which times of more payment for such earning is what called as price earning ratio.
To find the price-earnings ratio for any business, divide the market price by earning the amount of each share, which leads to the answer to the ratio by understanding how much money you are paying for each share.
Most people confuse the price-earning ratio and debt ratio, so let’s jump into the key difference in it anyway.
Info 3: price earning ratio vs debt ratio
The difference between the price-earning ratio and debt ratio is, that price price-earning ratio refers to the times of amount which are paid above than earnings of each share.
On the other side, the debt ratio shows the times of the amount which is more than the debts of the one company by using the assets.
So the key difference between the price-earnings ratio (PE ratio) and debt ratio are PE ratio shows the times the amount that is paid over earnings and the times the amount held by the business is more than a debt.
To make you more clear about the price-earnings ratio, let’s look into one brief example below.
Info 4: example of PE ratio
Say company Y had an earning of 6 dollars for each share with a market price of 367 dollars and had total assets of 24 billion dollars with liabilities of 7 billion dollars.
Dividing the market price of 367 dollars by 7 dollars in earnings of each share would show that the stock Investor paying 61 times more money than the real earnings of company Y.
And also by dividing the 7 billion dollars in liabilities by 24 billion dollars in assets, the results show that the assets of the company Y 0.29 times of money would be enough to pay off all the debts.
Here 61 times is a price earning per shares or PE ratio and 0.29 times is a debt ratio or D ratio.