Price To Earnings Ratio (PER)
Price to Earnings Ratio or PER is a figure used to identify whether a stock price highly priced or lowly valued. Price to Earning Ratio commonly compare among several companies in same industry. From that, we will know that whether the price of a particular company is highly priced or lowly priced.
In mathematical term, price to earning ratio can means stock price divided by earning per share (EPS) of a company. If the price remain constant, the bigger number of EPS, the lower company PER is. Actually what we like to see is high earning company with low stock price.
The stock price of company ABC is RM2.50 and its earning per share is RM0.40. With this simple calculation, we know that the company PER is around 6 ( 2.50/0.40=6.25). If the industry PER is 10, then company ABC is still consider a buy with its low PER. (Prior to the calculation of PER, we need to know the company EPS first. EPS can be calculated by dividing net earning by number of shares)
PER is a simple yet useful for investor. From a glance of company’s PER, we know that whether the company is still consider a buy or not at particular time. Definitely, we only buy when the company’s PER is at low. We sell when the company PER is at high level.
What PER is consider as low? It depends on the industry PER. We can take several company average PER as a benchmark. Just as example given above, with PER of 6, company PER is consider low compare to industry PER.
Another thing to mention is when calculating the PER of a company, make sure you keep up to date with the company price and EPS. Normally, the sources you get form newspaper or trading platform is old figures which update quarterly or annually. It might affect your judgment.
