Which of the following describes the price/earnings ratio PE method?

Which of the following describes the price/earnings ratio PE method?

Price earning ratio Spanish

The calculation of the PE Ratio is basic for the fundamental analysis of a stock and marks the amount you pay for each future dollar. Therefore, a high PE Ratio implies that you are paying more for future earnings, while a low one indicates the opposite, although this is not always positive and in this blog post we will explain why.

This directs us to review Apple’s PE, which currently stands at $25.68, meaning that for every $25 you invest in its stock you receive $1 of Apple’s reported earnings.

The PE Ratio tells us how much we receive for holding a stock that reports earnings, considering the effect these have on the price and the way they are distributed to shareholders.

Accordingly, you check the PE Ratio and notice that it is 13.97. This means that for every $14 you invest in Intel you can expect one unit of profit, which represents stability for the future of Intel and its stock.

P/e ratio interpretation

Perceived value is the value or merit that a consumer assigns to a product or service. Generally, buyers are unaware of the factors involved in the pricing of a given good, such as actual or estimated costs of production. Therefore, users rely on the emotional appeal of the good and the benefits they believe they will receive.

Perceived value then translates into the price a customer is willing to pay for a product or service. Consumers place value based on the analytical ability of the good to satisfy a need and provide satisfaction. The job of marketers is to shape and enhance the value perceived by users of the products and services they market.

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A luxury good is a product whose demand increases as customers’ incomes increase. Naturally, people with more substantial earnings allocate a greater share to the purchase of luxury goods and services, which are relatively expensive to obtain.

P/e ratio formula

Product refers to value added; domestic refers to production within the borders of an economy; and gross refers to the fact that it does not include changes in inventories or capital depreciation or appreciation.

Domestic Product versus National ProductGross Domestic Product (GDP) accounts for value added within the country, and Gross National Product (GNP) accounts for value added by domestically owned factors of production.

Gross Product versus Net ProductThe difference between the PB and the PN is the depreciation of capital, the Gross Product does not take into account the depreciation of capital while the Net Product does include it in the calculation.

Inflation:      It is the generalized increase in prices, but this is relative since there is constantly an increase in prices.    For economists, inflation is the progressive, constant, generalized increase in prices based on the previous increase. One increase generates another increase; this is what is called “the inflationary spiral”.    The concept of inflation is difficult to interpret as a symptom of the state of deterioration of the country’s economy, of a bad economic policy, of the country’s economic disorder.

Profit-to-Cost Ratio Conclusion

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 a lot with respect to the company’s earnings.

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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 a company’s PER 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.