КОЭФФИЦИЕНТ E RATIO ФОРЕКС

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Price-to-Earnings (P/E) Ratio

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

P/E may be estimated on a trailing (backward-looking) or forward (projected) basis.

Key Takeaways

  • The price-earnings (P/E) ratio relates a company’s share price to its earnings per share.
  • A high P/E ratio could mean that a company’s stock is over-valued, or else that investors are expecting high growth rates in the future.
  • Companies that have no earnings or that are losing money do not have a P/E ratio since there is nothing to put in the denominator.
  • Two kinds of P/E ratios — forward and trailing P/E — are used in practice.

The Price To Earnings Ratio Explained

P/E Ratio Formula and Calculation

The formula and calculation used for this process follow.

To determine the P/E value, one simply must divide the current stock price by the earnings per share (EPS).

The current stock price (P) can be found simply by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.

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EPS comes in two main varieties. “TTM” is a Wall Street acronym for “trailing 12 months.” This number signals the company’s performance over the past 12 months. The second type of EPS is found in a company’s earnings release, which often provides EPS guidance. This is the company’s best-educated guess of what it expects to earn in the future. The different versions of EPS form the basis of trailing and forward P/E, respectively.

Understanding the P/E Ratio

The price-to-earnings ratio (P/E) is one of the most widely used tools that investors and analysts use to determine a stock’s relative valuation. The P/E ratio helps one determine whether a stock is overvalued or undervalued. A company’s P/E can also be benchmarked against other stocks in the same industry or against the broader market, such as the S&P 500 Index.

Sometimes, analysts are interested in long-term valuation trends and consider the P/E 10 or P/E 30 measures, which average the past 10 or past 30 years of earnings, respectively. These measures are often used when trying to gauge the overall value of a stock index, such as the S&P 500 since these longer-term measures can compensate for changes in the business cycle.

The P/E ratio of the S&P 500 has fluctuated from a low of around 5x (in 1917) to over 120x (in 2009 right before the financial crisis). The long-term average P/E for the S&P 500 is around 16x, meaning that the stocks that make up the index collectively command a premium sixteen times greater than their weighted average earnings.

Analysts and investors review a company’s P/E ratio when they determine if the share price accurately represents the projected earnings per share.

Forward Price-To-Earnings

These two types of EPS metrics factor into the most common types of P/E ratios: the forward P/E and the trailing P/E. A third and less common variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

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The forward (or leading) P/E uses future earnings guidance rather than trailing figures. Sometimes called «estimated price to earnings,» this forward-looking indicator is useful for comparing current earnings to future earnings and helps provide a clearer picture of what earnings will look like – without changes and other accounting adjustments.

However, there are inherent problems with the forward P/E metric – namely, companies could underestimate earnings in order to beat the estimate P/E when the next quarter’s earnings are announced. Other companies may overstate the estimate and later adjust it going into their next earnings announcement. Furthermore, external analysts may also provide estimates, which may diverge from the company estimates, creating confusion.

Trailing Price-To-Earnings

The trailing P/E relies on past performance by dividing the current share price by the total EPS earnings over the past 12 months. It’s the most popular P/E metric because it’s the most objective – assuming the company reported earnings accurately. Some investors prefer to look at the trailing P/E because they don’t trust another individual’s earnings estimates. But the trailing P/E also has its share of shortcomings – namely, a company’s past performance doesn’t signal future behavior.

Investors should thus commit money based on future earnings power, not the past. The fact that the EPS number remains constant, while the stock prices fluctuate, is also a problem. If a major company event drives the stock price significantly higher or lower, the trailing P/E will be less reflective of those changes.

The trailing P/E ratio will change as the price of a company’s stock moves, since earnings are only released each quarter while stocks trade day in and day out. As a result, some investors prefer the forward P/E. If the forward P/E ratio is lower than the trailing P/E ratio, it means analysts are expecting earnings to increase; if the forward P/E is higher than the current P/E ratio, analysts expect a decrease in earnings.

Valuation From P/E

The price-to-earnings ratio or P/E is one of the most widely-used stock analysis tools used by investors and analysts for determining stock valuation. In addition to showing whether a company’s stock price is overvalued or undervalued, the P/E can reveal how a stock’s valuation compares to its industry group or a benchmark like the S&P 500 Index.

In essence, the price-to-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. If a company was currently trading at a P/E multiple of 20x, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

The P/E ratio helps investors determine the market value of a stock as compared to the company’s earnings. In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock’s price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.

Example of the P/E Ratio

As a historical example, let’s calculate the P/E ratio for Walmart Stores Inc. (WMT) as of November 14, 2022, when the company’s stock price closed at $91.09. The company’s profit for the fiscal year ending January 31, 2022, was US$13.64 billion, and its number of shares outstanding was 3.1 billion. Its EPS can be calculated as $13.64 billion / 3.1 billion = $4.40.

Walmart’s P/E ratio is, therefore, $91.09 / $4.40 = 20.70x.

Comparing Companies Using P/E

As an additional example, we can look at two financial companies to compare their P/E ratios with one another to see which is relatively over- or undervalued.

Bank of America Corporation (BAC) closed out the year 2022 with the following stats:

  • Stock Price = $29.52
  • Diluted EPS = $1.56
  • P/E = 18.92x ($29.52 ÷ $1.561)

In other words, Bank of America traded at roughly 19x trailing earnings. However, the 18.92 P/E multiple by itself isn’t helpful unless you have something to compare it with, such as the stock’s industry group, a benchmark index, or Bank of America’s historical P/E range.

Bank of America’s P/E at 19x was slightly higher than the S&P 500, which over time trades at about 15x trailing earnings.

To compare Bank of America’s P/E to a peer, we calculate the P/E for JPMorgan Chase & Co. (JPM) as of the end of 2022:

  • Stock Price = $106.94
  • Diluted EPS = $6.31
  • P/E = 16.94x

When you compare Bank of America’s P/E of almost 19x to JPMorgan’s P/E of roughly 17x, Bank of America stock does not appear as overvalued as it did when compared with the average P/E of 15 for the S&P 500. Bank of America’s higher P/E ratio might mean investors expected higher earnings growth in the future compared to JPMorgan and the overall market.

However, no single ratio can tell you all you need to know about a stock. Before investing, it is wise to use a variety of financial ratios to determine whether a stock is fairly valued and whether a company’s financial health justifies its stock valuation.

Investor Expectations

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. When a company has no earnings or is posting losses, in both cases P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is not the common convention.

A P/E ratio of «N/A» means the ratio is not available or not applicable for that company’s stock. A company can have a P/E ratio of N/A if it’s newly listed on the stock exchange and has not yet reported earnings, such as in the case of an initial public offering (IPO), but it also means a company has zero or negative earnings, Investors can thus interpret seeing «N/A» as a company reporting a net loss.

The price-to-earnings ratio can also be seen as a means of standardizing the value of one dollar of earnings throughout the stock market. In theory, by taking the median of P/E ratios over a period of several years, one could formulate something of a standardized P/E ratio, which could then be seen as a benchmark and used to indicate whether or not a stock is worth buying.

P/E vs. Earnings Yield

The inverse of the P/E ratio is the earnings yield (which can be thought of like the E/P ratio). The earnings yield is thus defined as EPS divided by the stock price, expressed as a percentage.

If Stock A is trading at $10, and its EPS for the past year was 50 cents (TTM), it has a P/E of 20 (i.e., $10 / 50 cents) and an earnings yield of 5% (50 cents / $10). If Stock B is trading at $20 and its EPS (TTM) was $2, it has a P/E of 10 (i.e., $20 / $2) and an earnings yield of 10% = ($2 / $20).

The earnings yield as an investment valuation metric is not as widely used as its P/E ratio reciprocal in stock valuation. Earnings yields can be useful when concerned about the rate of return on investment. For equity investors, however, earning periodic investment income may be secondary to growing their investments’ values over time. This is why investors may refer to value-based investment metrics such as P/E ratio more often than earnings yield when making stock investments.

The earnings yield is also useful in producing a metric when a company has zero or negative earnings. Since such a case is common among high-tech, high growth, or start-up companies, EPS will be negative producing an undefined P/E ratio (denoted as N/A). If a company has negative earnings, however, it will produce a negative earnings yield, which can be interpreted and used for comparison.

P/E vs. PEG Ratio

A P/E ratio, even one calculated using a forward earnings estimate, don’t always tell you whether or not the P/E is appropriate for the company’s forecasted growth rate. So, to address this limitation, investors turn to another ratio called the PEG ratio.

A variation on the forward P/E ratio is the price-to-earnings-to-growth ratio, or PEG. The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to provide investors with a more complete story than the P/E on its own. In other words, the PEG ratio allows investors to calculate whether a stock’s price is overvalued or undervalued by analyzing both today’s earnings and the expected growth rate for the company in the future. The PEG ratio is calculated as a company’s trailing price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.

The PEG ratio is used to determine a stock’s value based on trailing earnings while also taking the company’s future earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. For example, a low P/E ratio may suggest that a stock is undervalued and therefore should be bought – but factoring in the company’s growth rate to get its PEG ratio can tell a different story. PEG ratios can be termed “trailing” if using historic growth rates or “forward” if using projected growth rates.

Although earnings growth rates can vary among different sectors, a stock with a PEG of less than 1 is typically considered undervalued since its price is considered to be low compared to the company’s expected earnings growth. A PEG greater than 1 might be considered overvalued since it might indicate the stock price is too high as compared to the company’s expected earnings growth.

Absolute vs. Relative P/E

Analysts may also make a distinction between absolute P/E and relative P/E ratios in their analysis.

Absolute P/E

The numerator of this ratio is usually the current stock price, and the denominator may be the trailing EPS (TTM), the estimated EPS for the next 12 months (forward P/E), or a mix of the trailing EPS of the last two quarters and the forward P/E for the next two quarters.

When distinguishing absolute P/E from relative P/E, it is important to remember that absolute P/E represents the P/E of the current time period. For example, if the price of the stock today is $100, and the TTM earnings are $2 per share, the P/E is 50 = ($100/$2).

Relative P/E

The relative P/E compares the current absolute P/E to a benchmark or a range of past P/Es over a relevant time period, such as the past 10 years. The relative P/E shows what portion or percentage of the past P/Es the current P/E has reached. The relative P/E usually compares the current P/E value to the highest value of the range, but investors might also compare the current P/E to the bottom side of the range, measuring how close the current P/E is to the historic low.

The relative P/E will have a value below 100% if the current P/E is lower than the past value (whether the past high or low). If the relative P/E measure is 100% or more, this tells investors that the current P/E has reached or surpassed the past value.

Limitations of Using the P/E Ratio

Like any other fundamental designed to inform investors on whether or not a stock is worth buying, the price-to-earnings ratio comes with a few important limitations that are important to take into account, as investors may often be led to believe that there is one single metric that will provide complete insight into an investment decision, which is virtually never the case.

Companies that aren’t profitable, and consequently have no earnings—or negative earnings per share, pose a challenge when it comes to calculating their P/E. Opinions vary on how to deal with this. Some say there is a negative P/E, others assign a P/E of 0, while most just say the P/E doesn’t exist (not available—N/A) or is not interpretable until a company becomes profitable for purposes of comparison.

One primary limitation of using P/E ratios emerges when comparing P/E ratios of different companies. Valuations and growth rates of companies may often vary wildly between sectors due both to the differing ways companies earn money and to the differing timelines during which companies earn that money.

As such, one should only use P/E as a comparative tool when considering companies in the same sector, as this kind of comparison is the only kind that will yield productive insight. Comparing the P/E ratios of a telecommunications company and an energy company, for example, may lead one to believe that one is clearly the superior investment, but this is not a reliable assumption.

Other P/E Considerations

An individual company’s P/E ratio is much more meaningful when taken alongside P/E ratios of other companies within the same sector. For example, an energy company may have a high P/E ratio, but this may reflect a trend within the sector rather than one merely within the individual company. An individual company’s high P/E ratio, for example, would be less cause for concern when the entire sector has high P/E ratios.

Moreover, because a company’s debt can affect both the prices of shares and the company’s earnings, leverage can skew P/E ratios as well. For example, suppose there are two similar companies that differ primarily in the amount of debt they take on. The one with more debt will likely have a lower P/E value than the one with less debt. However, if business is good, the one with more debt stands to see higher earnings because of the risks it has taken.

Another important limitation of price-to-earnings ratios is one that lies within the formula for calculating P/E itself. Accurate and unbiased presentations of P/E ratios rely on accurate inputs of the market value of shares and of accurate earnings per share estimates. The market determines the prices of shares through its continuous auction. The printed prices are available from a wide variety of reliable sources. However, the source for earnings information is ultimately the company itself. This single source of data is more easily manipulated, so analysts and investors place trust in the company’s officers to provide accurate information. If that trust is perceived to be broken the stock will be considered riskier and therefore less valuable.

To reduce the risk of inaccurate information, the P/E ratio is but one measurement that analysts scrutinize. If the company were to intentionally manipulate the numbers to look better, and thus deceive investors, they would have to work strenuously to be certain that all metrics were manipulated in a coherent manner, which is difficult to do. That’s why the P/E ratio continues to be one of the centrally referenced points of data to analyze a company, but by no means the only one.

Frequently Asked Questions

What is a good price to earnings ratio?

The question of what is a good or bad price to earnings ratio will necessarily depend on the industry in which the company is operating. Some industries will have higher average price to earnings ratios, while others will have lower ratios. For example, on January 2022, publicly-traded US coal companies had an average P/E ratio of only about 7, compared to more than 60 for software companies. If you want to get a general idea of whether a particular P/E ratio is high or low, you can compare it to the average P/E of the competitors within its industry.

Is it better to have a higher or lower P/E ratio?

Many investors will say that it is better to buy shares in companies with a lower P/E, because this means you are paying less for every dollar of earnings that you receive. In that sense, a lower P/E is like a lower price tag, making it attractive to investors looking for a bargain. In practice, however, it is important to understand the reasons behind a company’s P/E. For instance, if a company has a low P/E because its business model is fundamentally in decline, then the apparent bargain might be an illusion.

What does a P/E ratio of 15 mean?

Simply put, a P/E ratio of 15 would mean that the current market value of the company is equal to 15 times its annual earnings. Put literally, if you were to hypothetically buy 100% of the company’s shares, it would take 15 years for you to earn back your initial investment through the company’s ongoing profits.

КОЭФФИЦИЕНТ E RATIO ФОРЕКС

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И они покупают акции в расчёте на прирост их капитализации. Но и для таких инвесторов коэффициент Р/Е пригодится. Дело в том, что компания, которая выплачивает высокие дивиденды, это успешная компания. У неё есть капитал и потенциал форекс аналитика для дальнейшего развития. Следовательно, есть предпосылки для роста биржевых котировок. Т.е компания с низким коэффициентом Р/Е зарабатывает высокую прибыль, будет развиваться в будущем и котировки её акций будут расти.

Анализ и инвесторы анализируют соотношение P / E компании, когда определяют, точно ли цена акции отражает прогнозируемую прибыль на акцию. Формула и расчет, используемые для этого процесса, следуют. P/E – коэффициент цена /прибыль – финансовый показатель, равный отношению рыночной капитализации компании на коэффициент p/e конец указанного года к её прибыли за тот же год. В таблице также приводятся значения коэффициента, рассчитанные как отношение текущей рыночной капитализации компании к прибыли за указанный год. Дополнительно для проверки оценки следует соотнести величину P/E компании с темпом роста ее чистой прибыли.

Канал Линейной Регрессии Как Построить И Как Использовать

Кроме того, этот коэффициент может быть рассчитан путем деления рыночной капитализации компании на ее годовую чистую прибыль. Коэффициент позволяет практически на лету сравнивать компании, имеющие разные обороты, доходность, стоимость. Но следует понимать, что значение цена прибыль не дает полной картины и дополнительно у него есть ряд недостатков и особенностей, которые нужно учитывать проводя сравнительный анализ. Является одним из основных показателей, применяющихся для сравнительной оценки инвестиционной привлекательности акционерных компаний. Малые значения коэффициента сигнализируют о недооценённости рассматриваемой компании, больши́е — о переоценённости. Существенным недостатком коэффициента является то, что он не может применяться для компании, показавшей в бухгалтерской отчётности убытки, так как стоимость компании при таком подходе будет отрицательной. Цена / прибыль (англ. PE ratio, P/E, earnings multiple, коэффициент «кратное прибыли») — финансовый показатель, равный отношению рыночной стоимости акции к годовой прибыли, полученной на акцию.

Помимо этого, низкий P/E говорит либо о том, что цена на рынке слишком низкая по сравнению с прибылью, которую генерирует компания; либо о том, что чистая прибыль резко выросла, но это пока не отразилось на стоимости акций. Это один из простых и наиболее популярных коэффициентов для сравнительной оценки акций представляет собой отношение цены акции к чистой прибыли на одну акцию за год и именуется коэффициентом (мультипликатором) P/E. У многих акций есть диапазоны стоимости, в которых они торгуются. Скажем, цена акций Macy’s обычно в 10 раз больше ее прибыли (соотношение P/E равно 10). Когда компания сообщает, что прибыль составит $4 на акцию, стоимость бумаг теоретически подтолкнется к $40 за акцию.

Показатель Дивидендной Доходности

Мы оцениваем дивидендный потенциал с помощью коэффициента Р/Е. Но для Акции BNTX многих инвесторов гораздо важнее, чтобы котировки на акции росли.

Так, по Питеру Линчу, P/E и темп роста прибыли должны совпадать. Если P/E в 2 раза меньше темпа роста прибыли, то это значит, что у акции есть потенциал роста. При этом с низким значением P/E инвестору следует быть осторожным. Низкое значение Р/Е цикличной компании часто предупреждает о том, что она находится на завершающей стадии своего роста и далее последует спад. Чем ниже значение показателя, тем меньшее количество лет потребуется для полного возмещения вложенного капитала.

Базовая Прибыль На Акцию (basic Earnings Per Share)

Это, как правило, более полезными для сравнения P / E соотношение одной компании с другими компаниями в той же отрасли, на рынке в целом или в отношении компании собственного исторического P / E. Позволяет оценить уровень недооцененности или переоцененности активов рынком. Считается как отношение показателя, содержащего рыночную стоимость актива (капитализация, цена акции, стоимость бизнеса) с отчетным финансовым коэффициент p/e показателем (выручка, прибыль, EBITDA и др.). Недооцененность или переоцененность актива оценивается при сравнении значения мультипликатора с мультипликаторами конкурентов. По коэффициенту Р/Е российские акции — одни из самых дешёвых в мире, несмотря на рост прибыли российских компаний. Инвесторы избегают российского рынка из-за рисков и непрозрачной, по их мнению, отчетности национальных компаний.

Ваши инвестиции только что выросли на 30% благодаря вашим проницательным навыкам. Это означает, что вам придется платить $7,76 за каждый $1 прибыли, к которой вы получаете доступ, покупая акции. Никто не любит переплачивать, так что лучше держаться подальше от компаний, соотношение цена/прибыль которых составляет 100 и более. Единственным исключением является вера инвестора в то, что в будущем прибыль компании будет расти такими темпами, которые со временем оправдают текущую цену. Если вы заметили, форвардное соотношение P/E у Macy’s немного увеличилось по сравнению со скользящим.

Инвестиционный Анализ «обуви России» Мфо Или Будущее Обувного Ритейла?

Поэтому для оценки конкретной российской компании по коэффициенту P/E нужно сравнивать его не с аналогичными зарубежными компаниями, а с российским среднерыночным индексом P/E. В широком смысле значение коэффициента выражает позицию рынка в отношении потенциала экономического роста компании, ее дивидендной политики и степени риска, связанного с инвестициями в эту компанию. Поскольку коэффициенты P/E рассчитываются исходя из прогнозируемых будущих темпов роста прибыли компании, заметно растущие компании обычно обладают более высокими показателями P/E и PEG по сравнению с компаниями, чей рост менее очевиден. По сути это резюме того, насколько акция дорога или дешева по сравнению с прибылью.

Расшифровывается показатель как P/E to Growth Rate, т.е. это соотношение P/E к показателю роста прибыли компании. Этот показатель применяют в тех случаях, когда компания имеет традиционно высокий P/E, например, для компаний из IT отрасли США, где Гатор индикатор P/E в районе 50 и более нормальное явление. Такие высокие P/E обычно вызваны ожиданием инвесторов относительно будущих темпов роста компании. Консервативный инвестор, покупая акции, смотрит в первую очередь на дивидендый потенциал ценной бумаги.

Особенности Использования Коэффициента

Это означает, что за бумаги компании вам придется заплатить больше по сравнению с потенциальным доходом. Это важный финансовый показатель, показывающий, насколько акция той или иной фирмы дорога или дешева по сравнению с ее прибылью. Говоря о различных видах P/E, стоит упомянуть также о показателе PEG.

Это произошло потому, что прогноз руководства компании в отношении результатов 2022 года оказался ниже, чем в прошлом году. Если стоимость акций фирмы останется прежней, но прибыль на акцию при этом сократится, соотношение цены и прибыли увеличится.

Investing Education: P/E Ratio

The P/E ratio tells investors how expensive a stock is compared to its earnings or profits. It can be used to compare stocks in a similar business or industry group but it’s not as helpful when comparing stocks in very different industries. Investors who are concerned about getting a good value try to avoid buying a stock when the P/E ratio is very high compared to its peers. A stock can also be unattractive when its P/E ratio is much higher than it has been in the past.

How the P/E Ratio Works

The P/E ratio stands for Share Price divided by Earnings Per Share (EPS) . The (ttm) following the ratio stands for Trailing Twelve Months , which means the last 12 months of EPS are used in the calculation. Imagine that a stock was trading for $40 per share and the total earnings per share over the last 12 months was $1.60. From that information you would know that its P/E ratio was 25 ($40 ÷ $1.60 = 25).

One way to think about the P/E ratio is that it tells you how much investors are willing to pay to “buy” the profits of a company. In the previous example, investors are willing to pay 25 times the annual profits of the company to buy ownership through shares. The flaw in this example is that the shareholder doesn’t actually get all of those profits (although some of it might be returned in the form of dividends).

The P/E ratio will change on a day-to-day basis because the stock’s price is one of the factors used in the calculation. The EPS for a company will only change once per quarter when new earnings reports are released. If earnings change dramatically from one quarter to the next the P/E ratio could change very quickly, but that kind of change will be rare.

Select two stocks that are in the same industry group and fairly correlated. If you don’t have two to start with then use LOW and HD, two stocks in the Retail/Hardware Store category. Find both of their P/E ratios and see which is lower. Has the stock with a lower P/E ratio outperformed the other over the last year?

Although P/E ratios are a very small window into the performance of a company they can still be useful. Some investors will use measures like the P/E ratio to compare stocks within the same industry group. Assuming all else is equal the stock with the lower P/E ratio may be considered a cheaper stock or better value .

P/E ratios can also help you identify companies that are considered growth stocks versus the so-called “blue-chip” or defensive stocks. Stocks with very high P/E ratios relative to the market averages are priced that way because investors expect that future earnings will be much higher than the earnings seen over the last 12 months. Blue chip or defensive stocks will usually have a much lower P/E ratio because growth expectations are lower for the future. You can include those growth expectations in the P/E ratio to help compare slow growing and fast growing companies.

Improving the P/E Ratio

Adding growth to the P/E ratio turns it into the P/E/G or “peg” ratio. To calculate a P/E/G ratio take the stock price divided by the last 12 months of EPS plus the projected growth rate for the next five years. For example, imagine a stock with share price of $40, EPS of $1.60 and expected growth of 30% over the next five years. That stock’s P/E/G ratio would be 1.27 ($40 ÷ $1.60 + 30 = 1.27). Traditionally a P/E/G ratio near 1 is considered fairly valued while greater 1 one is over-valued and less than 1 is under-valued .

As you can see in the previous image, the PEG ratio is available on the right side of the Summary page under the chart and Key Statistics. Compare the PEG ratio of the two stocks you selected in the first exercise and see how they compare. Did the relative value between them change? If you were making a choice between the two stocks would your opinion change now that you know more about growth estimates?

Summary

The P/E ratio has its limitations but it can be useful as a way to think about the value of a company relative to its earnings or profits. It is sometimes used to compare two very similar stocks to determine which is the better value but should not be used by itself. The greater the P/E ratio the greater the growth expectations, but it is also likely that those stocks will also experience greater volatility in a bear market.

Debt-To-Equity Ratio (D/E)

The debt-to-equity (D/E) ratio is used to evaluate a company’s financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity.

The D/E ratio is an important metric used in corporate finance. It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn. The debt-to-equity ratio is a particular type of gearing ratio.

Key Takeaways

  • The debt-to-equity (D/E) ratio compares a company’s total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using.
  • Higher-leverage ratios tend to indicate a company or stock with higher risk to shareholders.
  • However, the D/E ratio is difficult to compare across industry groups where ideal amounts of debt will vary.
  • Investors will often modify the D/E ratio to focus on long-term debt only because the risks associated with long-term liabilities are different than short-term debt and payables.

The Debt To Equity Ratio

Debt-to-Equity (D/E) Ratio Formula and Calculation

The information needed for the D/E ratio is on a company’s balance sheet. The balance sheet requires total shareholder equity to equal assets minus liabilities, which is a rearranged version of the balance sheet equation:

These balance sheet categories may contain individual accounts that would not normally be considered “debt” or “equity” in the traditional sense of a loan or the book value of an asset. Because the ratio can be distorted by retained earnings/losses, intangible assets, and pension plan adjustments, further research is usually needed to understand a company’s true leverage.

Because of the ambiguity of some of the accounts in the primary balance sheet categories, analysts and investors will often modify the D/E ratio to be more useful and easier to compare between different stocks. Analysis of the D/E ratio can also be improved by including short-term leverage ratios, profit performance, and growth expectations.

How to calculate the D/E ratio in Excel

Business owners use a variety of software to track D/E ratios and other financial metrics. Microsoft Excel provides a balance sheet template that automatically calculates financial ratios such as the D/E ratio and debt ratio. However, even the amateur trader may want to calculate a company’s D/E ratio when evaluating a potential investment opportunity, and it can be calculated without the aid of templates.

What Does the Debt-to-Equity (D/E) Ratio Tell You?

Given that the D/E ratio measures a company’s debt relative to the value of its net assets, it is most often used to gauge the extent to which a company is taking on debt as a means of leveraging its assets. A high D/E ratio is often associated with high risk; it means that a company has been aggressive in financing its growth with debt.

If a lot of debt is used to finance growth, a company could potentially generate more earnings than it would have without that financing. If leverage increases earnings by a greater amount than the debt’s cost (interest), then shareholders should expect to benefit. However, if the cost of debt financing outweighs the increased income generated, share values may decline. The cost of debt can vary with market conditions. Thus, unprofitable borrowing may not be apparent at first.

Changes in long-term debt and assets tend to have the greatest impact on the D/E ratio because they tend to be larger accounts compared to short-term debt and short-term assets. If investors want to evaluate a company’s short-term leverage and its ability to meet debt obligations that must be paid over a year or less, they can use other ratios.

For example, an investor who needs to compare a company’s short-term liquidity or solvency will use the cash ratio:

instead of a long-term measure of leverage such as the D/E ratio.

Modifications to the Debt-to-Equity (D/E) Ratio

The shareholders’ equity portion of the balance sheet is equal to the total value of assets minus liabilities, but that isn’t the same thing as assets minus the debt associated with those assets. A common approach to resolving this issue is to modify the D/E ratio into the long-term D/E ratio. An approach like this helps an analyst focus on important risks.

Short-term debt is still part of the overall leverage of a company, but because these liabilities will be paid in a year or less, they aren’t as risky. For example, imagine a company with $1 million in short-term payables (wages, accounts payable, and notes, etc.) and $500,000 in long-term debt, compared to a company with $500,000 in short-term payables and $1 million in long-term debt. If both companies have $1.5 million in shareholder equity, then they both have a D/E ratio of 1.00. On the surface, the risk from leverage is identical, but in reality, the second company is riskier.

As a rule, short-term debt tends to be cheaper than long-term debt, and it is less sensitive to shifting interest rates, meaning the second company’s interest expense and cost of capital are higher. If interest rates fall, long-term debt will need to be refinanced, which can further increase costs. Rising interest rates would seem to favor the company with more long-term debt, but if the debt can be redeemed by bondholders it could still be a disadvantage.

The Debt-to-Equity (D/E) Ratio for Personal Finances

The D/E ratio can apply to personal financial statements as well, in which case it is also known as the personal D/E ratio. Here, “equity” refers to the difference between the total value of an individual’s assets and the total value of their debt or liabilities. The formula for the personal D/E ratio is represented as:

The personal D/E ratio is often used when an individual or small business is applying for a loan. Lenders use the D/E to evaluate how likely it would be that the borrower is able to continue making loan payments if their income was temporarily disrupted.

For example, a prospective mortgage borrower who is out of a job for a few months is more likely to be able to continue making payments if they have more assets than debt. This is also true for an individual applying for a small business loan or line of credit. If the business owner has a good personal D/E ratio, it is more likely that they can continue making loan payments while their business is growing.

Debt-to-Equity (D/E) Ratio vs. the Gearing Ratio

Gearing ratios constitute a broad category of financial ratios, of which the D/E ratio is the best example. «Gearing» simply refers to financial leverage.

Gearing ratios focus more heavily on the concept of leverage than other ratios used in accounting or investment analysis. This conceptual focus prevents gearing ratios from being precisely calculated or interpreted with uniformity. The underlying principle generally assumes that some leverage is good, but too much places an organization at risk.

At a fundamental level, gearing is sometimes differentiated from leverage. Leverage refers to the amount of debt incurred for the purpose of investing and obtaining a higher return, while gearing refers to debt along with total equity—or an expression of the percentage of company funding through borrowing. This difference is embodied in the difference between the debt ratio and the D/E ratio.

The real use of debt/equity is comparing the ratio for firms in the same industry—if a company’s ratio varies significantly from its competitors’ ratios, that could raise a red flag.

Limitations of the Debt-to-Equity (D/E) Ratio

When using the D/E ratio, it is very important to consider the industry in which the company operates. Because different industries have different capital needs and growth rates, a relatively high D/E ratio may be common in one industry, while a relatively low D/E may be common in another.

Utility stocks often have a very high D/E ratio compared to market averages. A utility grows slowly but is usually able to maintain a steady income stream, which allows these companies to borrow very cheaply. High-leverage ratios in slow-growth industries with stable income represent an efficient use of capital. The consumer staples or consumer non-cyclical sector tends to also have a high D/E ratio because these companies can borrow cheaply and have a relatively stable income.

Analysts are not always consistent about what is defined as debt. For example, preferred stock is sometimes considered equity, but the preferred dividend, par value, and liquidation rights make this kind of equity look a lot more like debt.

Including preferred stock in total debt will increase the D/E ratio and make a company look riskier. Including preferred stock in the equity portion of the D/E ratio will increase the denominator and lower the ratio. It can be a big issue for companies such as real estate investment trusts (REITs) when preferred stock is included in the D/E ratio.

Examples of the Debt-to-Equity (D/E) Ratio

At the end of 2022, Apache Corporation (APA) had total liabilities of $13.1 billion, total shareholder equity of $8.79 billion, and a D/E ratio of 1.49. ConocoPhillips (COP) had total liabilities of $42.56 billion, total shareholder equity of $30.8 billion, and a D/E ratio of 1.38 at the end of 2022:

On the surface, it appears that APA’s higher-leverage ratio indicates higher risk. However, this may be too generalized to be helpful at this stage, and further investigation would be needed.

We can also see how reclassifying preferred equity can change the D/E ratio in the following example, in which it is assumed that a company has $500,000 in preferred stock, $1 million in total debt (excluding preferred stock), and $1.2 million in total shareholder equity (excluding preferred stock).

The D/E ratio with preferred stock as part of total liabilities would be as follows:

The D/E ratio with preferred stock as part of shareholder equity would be:

Other financial accounts, such as unearned income, will be classified as debt and can distort the D/E ratio. Imagine a company with a prepaid contract to construct a building for $1 million. The work is not complete, so the $1 million is considered a liability.

Assume that the company has purchased $500,000 of inventory and materials to complete the job, which has increased total assets and shareholder equity. If these amounts are included in the D/E calculation, the numerator will be increased by $1 million and the denominator by $500,000, which will increase the ratio.

Frequently Asked Questions

What is a good debt-to-equity (D/E) ratio?

What counts as a “good” debt-to-equity (D/E) ratio will depend on the nature of the business and its industry. Generally speaking, a D/E ratio below 1.0 would be seen as relatively safe, whereas ratios of 2.0 or higher would be considered risky.

Some industries, such as banking, are known for having much higher D/E ratios than others. Note that a D/E ratio that is too low may actually be a negative signal, indicating that the firm is not taking advantage of debt financing to expand and grow.

What does a debt-to-equity (D/E) ratio of 1.5 indicate?

A debt-to-equity ratio of 1.5 would indicate that the company in question has $1.50 of debt for every $1 of equity. To illustrate, suppose the company had assets of $2 million and liabilities of $1.2 million. Because equity is equal to assets minus liabilities, the company’s equity would be $800,000. Its D/E ratio would therefore be $1.2 million divided by $800,000, or 1.5.

What does it mean for D/E to be negative?

If a company has a negative D/E ratio, this means that the company has negative shareholder equity. In other words, it means that the company has more liabilities than assets. In most cases, this is considered a very risky sign, indicating that the company may be at risk of bankruptcy. For instance, if the company in our earlier example had liabilities of $2.5 million, its D/E ratio would be -5.

What industries have high D/E ratios?

In the banking and financial services sector, a relatively high D/E ratio is commonplace. Banks carry higher amounts of debt because they own substantial fixed assets in the form of branch networks. Other industries that commonly show a relatively higher ratio are capital-intensive industries, such as the airline industry or large manufacturing companies, which utilize a high level of debt financing as a common practice.

How can the D/E ratio be used to measure a company's riskiness?

A higher D/E ratio may make it harder for a company to obtain financing in the future. This means that the firm may have a harder time servicing its existing debts. Very high D/Es can be indicative of a credit crisis in the future, including defaulting on loans or bonds, or even bankruptcy.

Ratio Analysis: The Price-Earnings Ratio

The price-earnings ratio is the second major valuation ratio profiled in Axel Tracy's book, Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet.

The first was earnings per share or EPS. As noted in our digest of that ratio, knowing the EPS is helpful but incomplete knowledge, since it does not factor in the share price. If earnings per share are $1, that would be an excellent return on a $5 stock but a disappointing return on a $20 stock.

That's where the price-earnings ratio (also called "price multiple" or "earnings multiple") helps investors . As the name suggests, it lays out the relationship between the price of a share and the earnings of each share.

In Tracy's words, "Since earnings and EPS is closely linked to stock price value, the P/E Ratio can be regarded as a measure of value (cheap or expensive) because in theory it measures how much investors are willing to pay for a given level of EPS, i.e. "this stock is cheap because I only have to pay 4 times its EPS" or "this stock is expensive because I am paying 50 times its EPS"."

While there are different opinions on the usefulness of the price-earnings ratio, there's no doubting its popularity. It figures prominently within the investment community and in media coverage of the relative valuations of various markets.

When used this way, the ratio becomes a barometer for the cheapness or expensiveness of markets, not just stocks. Investors and analysts who follow the short-term gyrations of the market will tell us that a market such as the New York Stock Exchange or Nasdaq is getting more or less expensive based on the price-earnings ratio of all its component companies.

It is easy to calculate the formula:

Price/Earnings (P/E) Ratio = Stock Price / Earnings per Share

For example, if the stock price is $100 and the earnings per share are $7.50, then the Price/Earnings ratio is 13.33 ($100 / $7.50). To determine numbers for the calculation, get the stock price from your broker or any reporting service, while the earnings per share number can be calculated using information from quarterly or annual reports, from the financial statements or from a reporting service.

GuruFocus provides the price-earnings ratio, plus a couple of variations. The ratio number is found at the top of the Ratios section on a stock's Summary page; below is a screenshot of the GuruFocus Ratios section for United Parcel Service (NYSE:UPS):

Immediately to the right of the label, "PE Ratio," is the ratio value itself. Is 21.62 a good ratio, a bad one, or something else? The colored bars to the right of the number provide a couple of clues. The first colored bar shows how 21.62 compares to the price-earnings ratios of peer companies. The reddish hue indicates UPS compares unfavorably. Under the "Vs History" column, it shows how the current price-earnings compares to the ratio's history for that company. The green color shows it compares favorably to its ratio in the past.

Just below it is the "Forward PE", a name that captures the forward-looking nature of this metric. It is an estimate price-earnings ratio based on the projected earnings of the next 12 months, or the next full fiscal year.

Third, we see "PE Ratio without NRI", which stands for a price-earnings ratio that does not include non-recurring income (something such as the sale of a major asset). In most cases, investors want to know the regular operating income, since non-recurring items can paint a misleading picture.

Getting back to the regular price-earnings ratio, the number also tells us how many years of earnings it will take to match the stock price. From another perspective, it shows how much an investor would have to pay to buy the earnings of a stock.

Each time the price of the stock changes or the earnings change, the price-earnings ratio will change, too. In turn, the stock price is determined by investor preferences as well as economic conditions. On the other hand, changes in earnings reflect what management has done well or done poorly. To some extent, economic conditions can make a difference in management's performance, too.

Turning to the drawbacks of using the price-earnings ratio, Tracy noted that it is best used within industries to compare one company with another company in the same industry. Some industries, he noted, have naturally higher price-earnings ratios than other industries. Of course, industry averages can be computed and the companies within it compared with each other, and averages per industry can be compared with each other.

The other significant drawback is that the ratio may not tell you whether a stock is expensive or cheap. He added,

For the original assumption to hold then you must expect that a 'cheap' stock will eventually rise to fair value and an 'expensive' stock will eventually fall. As one of my investment idols said: you may be comparing a 'cheap' 4-cylinder hatchback car, to an 'expensive' V8 racecar. The racecar will always be a better car, always perform better and always win the race. Just because you bought the 'cheap' car doesn't mean its performance will rise to a fair, average level in the future and catch up to the racecar. After all, there may be a very valid reason why it was so cheap.

Conclusion

The price-earnings ratio is one of the best known and most commonly cited ratios. It is a valuation ratio, meaning it is designed to help investors determine whether the price of a stock is high, low or somewhere in between.

It is calculated by dividing the stock price by a year's earnings, whether in the past or in the future (forward P/E). It is also applied to industries and whole markets to give investors a comparative sense of their health.

By itself, though, it is not enough on which to make a buy/sell decision. A low price-earnings ratio may reflect either a market that doesn't realize the value of a stock or a company that is financially unwell.

Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.

Debt to Equity Ratio Formula

The term “debt to equity ratio” refers to the financial ratio that compares the capital contributed by the creditors and the capital contributed by the shareholder. In other words, the ratio captures the relationship between the fraction of the total assets that have been funded by the creditors and the fraction of the total assets that have been funded by the shareholders. The formula for debt to equity ratio can be derived by dividing the total liabilities by the total equity of the company. Mathematically, it is represented as,

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Examples of Debt to Equity Ratio Formula (With Excel Template)

Let’s take an example to understand the calculation of the Debt to Equity Ratio in a better manner.

Debt to Equity Ratio Formula – Example #1

Let us take a simple example of a company with a balance sheet. Calculate the debt to equity ratio of the company based on the given information.

Solution:

Total Liabilities is calculated using the formula given below

Total Liabilities = Non-Current Liabilities + Current Liabilities

  • Total Liabilities = $25,000 + $24,000
  • Total Liabilities = $49,000

Total Equity is calculated as:

Total Equity = Shareholder’s Equity

  • Total Equity = $65,000

Debt to Equity Ratio is calculated using the formula given below

Debt to Equity Ratio = Total Liabilities / Total Equity

  • Debt to Equity Ratio = $49,000 / $65,000
  • Debt to Equity Ratio = 0.75

Therefore, the debt to equity ratio of the company is 0.75.

Debt to Equity Ratio Formula – Example #2

Let us take the example of XYZ Ltd that has published its annual report recently. As per the balance sheet as on December 31, 2022, information is available. Calculate the debt to equity ratio of XYZ Ltd based on the given information.

Solution:

Total Liabilities is calculated using the formula given below

Total Liabilities = Accounts Payable + Current Portion of Long Term Debt + Short Term Debt + Long Term Debt + Other Current Liabilities

  • Total Liabilities = $17,000 + $3,000 + $20,000 + $50,000 + $10,000
  • Total Liabilities = $100,000

Total Equity is calculated using the formula given below

Total Equity = Common Equity + Retained Earnings + Preferred Equity

  • Total Equity = $100,000 + $50,000 + $100,000
  • Total Equity = $250,000

Debt to Equity Ratio is calculated using the formula given below

Debt to Equity Ratio = Total Liabilities / Total Equity

  • Debt to Equity Ratio = $100,000 / $250,000
  • Debt to Equity Ratio = 0.40

Therefore, the debt to equity ratio of XYZ Ltd stood at 0.40 as on December 31, 2022.

Debt to Equity Ratio Formula – Example #3

Let us take the example of Apple Inc. to calculate debt to equity ratio as per its balance sheet dated September 29, 2022. The following financial information (all amount in millions) is available:

Solution:

Total Liabilities is calculated using the formula given below

Total Liabilities = Accounts Payable + Other Current Liabilities + Deferred Revenue + Commercial Paper + Term Debt + Other Non-Current Liabilities

  • Total Liabilities = $55,888 + $32,687 + $10,340 + $11,964 + $102,519 + $45,180
  • Total Liabilities = $258,578

Total Equity is calculated using the formula given below

Total Equity = Common Equity and Additional Paid in Capital + Retained Earnings + Accumulated other Comprehensive Income (Loss)

  • Total Equity = $40,201 + $70,400 – $3,454
  • Total Equity = $107,147

Debt to Equity Ratio is calculated using the formula given below

Debt to Equity Ratio = Total Liabilities / Total Equity

  • Debt to Equity Ratio = $258,678 million / $107,147 million
  • Debt to Equity Ratio = 2.41

Therefore, the debt to equity ratio of Apple Inc. stood at 2.41 as on September 29, 2022.

Explanation

The formula for debt to equity ratio can be derived by using the following steps:

Step 1: Firstly, calculate the total liabilities of the company by summing up all the liabilities which is available in the balance sheet. Examples of liabilities include accounts payable, long term debt, short term debt, capital lease obligation, other current liabilities, etc.

Step 2: Next, calculate the total equity of the company by adding up all that is available under shareholder’s equity and some of the examples of equity include common equity, preferred equity, retained earnings, additional paid-in capital, etc.

Step 3: Finally, the formula for debt to equity ratio can be derived by dividing the total liabilities (step 1) by the total equity (step 2) of the company as shown below.

Debt to Equity = Total Liabilities / Total Equity

Relevance and Uses of Debt to Equity Ratio Formula

From the perspective of lenders and credit analyst, it is important to understand the concept of debt to equity ratio because it is used to assess the degree to which an entity is leveraged. Typically, a relatively high debt to equity ratio signifies that the company unable to make adequate cash vis-à-vis the debt obligations. On the other hand, a low value of debt to equity ratio can be indicative of the fact that the company is not taking advantage of financial leverage. Inherently, debt-to-equity ratios are higher for capital intensive as compared to low capital industries because the capital intensive companies are required to incur regular capital expenditure in the form of new plants and equipment to operate efficiently. As such, it is always advisable to compare debt to equity ratios of companies in the same industry.

Debt to Equity Ratio Formula Calculator

You can use the following Debt to Equity Ratio Calculator

This has been a guide to Debt to Equity Ratio Formula. Here we discuss How to Calculate Debt to Equity Ratio along with practical examples. We also provide a Debt to Equity Ratio Calculator with downloadable excel template. You may also look at the following articles to learn more –

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