Читать книгу Cotter On Investing - John Cotter - Страница 11

The PE ratio basically compares the market value of a company with its profits.

To calculate the PE we use the share price to represent the market capitalisation and earnings per share (EPS) to represent profits. The formula for the PE ratio is:

PE ratio = share price/earnings per share

For example, if a company’s share price is 36p and its earnings per share are 4p, its PE ratio is nine (sometimes expressed as “9x” – meaning “nine times”).

If a company does not have earnings (i.e. they are making a loss) then a PE can not be calculated.

One way of looking at the PE ratio is as representing the number of years required for the earnings per share to cover the share price.

Let’s look at two companies:

	Company A	Company B
Share price(p)	100	100
Earnings per share(p)	20	50
PE	5	2

 Company A has a share price of 100p and EPS of 20p; it therefore has a PE of 5 (100/20); it would take 5 years for the earnings to cover the price paid for the share.

 Company B has a share price of 100p and EPS of 50p; it therefore has a PE of 2 (100/50); it would take 2 years for the earnings to cover the price paid for the share.

All things being equal (which, admittedly, they rarely are in investing) an investor would prefer to buy company B rather than company A because the earnings will pay for the price paid in just two (instead of five) years.

One way to think of this is as an investor buying the whole company. In the case of company A, it will take five years for the company’s earnings to repay the price paid to buy the company, But for company B it will only take two years. Which company would you prefer to buy?

In this context, company B is called cheaper than company A because its PE ratio is lower.

Unfortunately, nothing in life is as simple as you would like it to be and few things are as difficult as keeping things simple. Let’s first of all see how this position becomes more confused before hopefully I reach a simple and logical conclusion that will help guide your future use of the PE.