How is PE calculated?

How is PE calculated?

How earnings per share are calculated

The break-even point of a company, also known as Break Even, is when the business income covers fixed and variable expenses. This means that you manage to sell as much as you spend, you neither win nor lose.

The break-even point is considered a necessary indicator to calculate, not only the efficiency of a company’s operations, but also the volume of net sales necessary for a business to neither win nor lose.

Gino manages Misouvenir.pe, an online sales portal of technological souvenirs that offers them for S/. 50 each. Manufacturing, promoting, invoicing (electronically) and delivering these souvenirs to customers costs S/. 35 per unit and during the month he has total fixed costs (electricity, Internet, water, rents, administrative salaries) for which he spends S/. 7,500. Last month it sold 1,000 souvenirs with ample growth expectations. Let us calculate the break-even point of our friend Gino’s company.

For sales of 500 units per month, the profit before interest and taxes should be equal to zero, if he produces less than 500 he has ‘operating loss’ and if he produces and sells more than 500 units he will start to make a profit.

How the break-even point is calculated

The break-even point is established through a calculation that serves to define the moment in which the income of a company covers its fixed and variable expenses, that is, when you manage to sell the same as you spend, you neither win nor lose, you have reached the break-even point.

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Thus, calculating the break-even point is fundamental for companies to evaluate their profitability, since this way it is possible to know how much they need to sell to generate profit. Knowing this value, even before starting a new project, allows you to know how financially interesting your business idea is. Making the calculation also helps to know how much time, approximately, your business will need to start making profits. In other words, it is a fundamental stage for any business plan.

Thinking about more difficult periods, such as the Coronavirus pandemic, for example, with the help of the break-even point it is possible to create a contingency policy and, in this way, reduce unpleasant surprises in the middle of the road.

Spanish price earning ratio

The break-even analysis indicates to a company the level of sales it must reach to cover the total costs generated by manufacturing and marketing products. Knowing this is key to defining at what point your activities begin to produce profits. Learn how to determine this measure.

“The break-even point analysis reflects this information, allowing to calculate the level of sales in pesos or units that the company must reach to cover its costs. “Tweet ThisWhenever a company decides to start activities, it does so with the intention of obtaining a level of profitability that justifies the investment made by the partners to start it up. In order to achieve this, it is necessary that the level of sales allows, on the one hand, to cover the costs incurred to go out to the market to offer the products, and on the other hand, to obtain a surplus to distribute among the partners.

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P/e ratio formula

The P/E ratio is one of the most widely used financial ratios in fundamental analysis.  It tells us whether a company’s stock is overvalued or undervalued, because it indicates whether the price of a share has risen or fallen sharply relative to the company’s earnings.

However, it should be noted that if a company’s P/E is very low (indicating undervaluation of the price) it can also mean that a company’s shares are undervalued for a good reason.

One of the reasons why this price-earnings ratio is so widely used is because it is easy to calculate and simple to understand. It is calculated by dividing the price of a share by the company’s earnings per share:

Looking at the PER of a company on its own does not make much sense, to use this ratio well we must compare it with that of its peers, i.e. companies in the same industry with similar characteristics. For example, a P/E of 17 for a bank may be high, but for a technology company it may be a low ratio.

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