How to Calculate Price-to-earnings (P/E)

Sun, 06 Jul 2008 07:00:02 PST

Price-to-Earnings or P/E as it is commonly known is a measure of business price cost. It basically tells you how many years it takes to repay the business purchase from current earnings.

In the area of stock market listed companies P/E is calculated by dividing the share price by the earnings per share, or EPS. The resulting figure expresses times to repay. EPS is calculated by dividing the Net Profit After Tax, NPAT, by the number of shares outstanding for the company in question.

As an example, the share price of Brambles Ltd, BXB, is today $7.82 and its EPS are $0.45. The P/E is 7.82/0.45 = 17.37 times or years to repay.

Alternatively, P/E can be calculated from whole, non-per-share figures. To do so you divide the companies' Capitalisation by the NPAT. Capitalisation is the share price multiplied by the number of shares outstanding for the company.

An alternative measure of business purchase cost is Price-to-Book or P/B. Book value is the business Equity divided by the number of shares outstanding for the business. Book value is also called Equity per Share.

Still on the BXB example, its P/B is $7.82 divided by $1.18 equalling 6.63 times. This ratio tells you how many times the price represents the equity in the business.

You could get the figures above directly and ready made from an online database of your choice or look them up in the Annual Report you could download from the website of the company in question under corporate.

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Knowing the Book Value Per Share

Sun, 13 May 2007 08:40:59 PST

A common shareholder gets what is left over after the corporate debt holders, preferred shareholders and govt-tax. The dividend to a common shareholder comes after the company pays to debtors, preferred shareholders of the company and taxes. The book value of a particular share then becomes the price he gets after all these have been paid to. It is not the market price of a share.

The book value is easy and quick to calculate. With the availability of online finance related websites like Yahoo Finance one can find the balance sheet, assets and share capital of a company. From this information one can find the book value of a stock by subtracting the debt to be paid to debt holders, tax and preferred shareholders? pie from the accounting value of company?s assets. By dividing this value by the total number of outstanding shares, one can get the book value per share.

The book value per share can also be supplemented with the P/E ratio when comparing two companies. Some times the company?s financial are so good that the book value per share is larger than the market price at which it is trading. Then the stock is undervalued. As we know from the world?s famous investor of all time, Warren Buffet, that we need to buy fundamentally sound stocks at the cheapest possible price. Some times reverse can happen. But at any time the share price will be higher than book value per share. But if it is too high and the company?s future growth is not as predictable then it is better to leave the stock.