Opentrain Share Tips
Price/Earnings Ratio
The price/Earning ratio shows the relationship between a share’s current price and its profit, or earnings. These earnings are based on what was reported in the financial statements for the most recent 12 months. To eliminate distortions, we always use the headline earnings per share (HEPS) number for earnings.
To calculate the PE ratio, we you divide the share price by the most recent year’s HEPS. Based on those 12 months’ performance, we will know how many years to wait for the company to earn back what we’re paying for the shares today. For instance a PE ratio of 15 means it will be a decade and a half at the current profitability before our investment is “repaid” by the company.
Investors try to purchase shares at the lowest possible price. Where possible try to buy when the PE ratio is low and sell once it rises too much. But getting this timing right requires forecasting into the future.
Introduction
tutorial for the individual self-investor. Useful hints and tips
beginning your first venture into trusts / shares.
www.opentrain.co.uk/sharetips. Share tips, share tutorials,
introduction to investing in shares and funds