Tag Archives: PE ratio

How to estimate future PE ratios

Much the same as future EPS growth, estimation of future PE ratios is an important skill to have in place as a value investor. A company’s price to earnings ratio (PE) is a relative measure of how expensive or cheap a company is – check out this primer explaining what factors affect PE and why it’s important. In this article we’ll look at a few different techniques to estimate future PE ratios. Continue reading

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How to use PE ratios for stock evaluation

In a previous article, we explored earnings, why they’re important to us as investors, and learned how to calculate EPS (earnings per share). In summary, EPS is simply a way to express a company’s earnings in a manner that is independent of the number of shares outstanding. This allows us to do some pretty useful comparisons between companies, especially when we introduce the PE ratio (Price / Earnings ratio).

We’re going to look at how we can use PE ratios to determine whether a stock is expensive, cheap, or priced comparatively to its peers. But first, let’s look at how businesses are priced in a bit more detail. To do this, let’s look at a fictitious company, XYZ which had earnings (profit) of $10,000 last year. Let’s ignore the value of the company’s assets for a moment and assume they’re zero. How much is XYZ worth? Continue reading

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