P/E Price Earnings Ratio Analysis in 10 minutes: Financial Ratio Analysis Tutorial

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P/E Price Earnings Ratio in 10 minutes: Financial Ratio Analysis Tutorial
http://www.youtube.com/watch?v=Zu-D8o...

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Closed Caption:

Price Earnings Ratio
Hi! Before this video, you should already
understand the words and concepts found in
financial statements. Now, when I say financial
statements, we normally mean the Balance Sheet
and the Income Statement.
Welcome back to MBAbullshit.com. The topic
for this video is the Price Earnings Ratio,
also known as the PE Ratio or P/E Ratio, which
is one of the market value measurements in
financial ratio analysis. So, remember you
can always go back to MBAbullshit.com.
Alright! So, let's get down to it. So, this
video discusses and analyzes the Price Earnings
Ratio, one of my free videos on liquidity,
profitability, and market value. So, these
ratios include these ones over here. After
this you can check out my next videos on MBAbullshit.com,
such as my next video on financial leverage,
which includes these ratios over here. And
yet another video on turnover ratios, which
includes these ratios down here.
Alright! So now let's start. Now, I'd like
to start with a story. Okay. Let's say that
ABC Company’s share price in the open market
is $100.00 and last year's earnings were $10.00
per share. What is the Price Earnings Ratio?
Very simple. Now, you'll notice that in financial
ratio analysis, computing the ratio is the
easiest thing. Okay. It's the easiest thing
to do. What's more important is how you interpret
or analyze or understand the ratio. So, anyway,
the Price Earnings Ratio here is simply $100.00
divided by $10.00. Where did we get the $100.00?
That's the share price. Where did we get the
$10.00? That's last year's earnings. Okay.
Last year's earnings declared, of course,
the news comes out this year, about last year.
And our Price Earnings Ratio is a very simple
10. What does this 10 mean? Well, it means
that ABC's stock is selling in the market
for 10 times its earnings. That's all it means,
very simple. How do we use this? Is this good
or bad? Or rather, is it preferred to have
a high Price Earnings Ratio? Like maybe 20?
Or a low Price Earnings Ratio? Like maybe
6?
Alright. Which is better? Well, a low Price
Earnings Ratio can be good because it means
that the stock is selling for cheap. And therefore,
the stock is good value for investors. However,
a low Price Earnings Ratio can also be bad
because you have to ask yourself, “why is
it selling cheap?” Maybe they're expecting
bad news in the future or bad news in the
near future and the company has problems.
Therefore, people are willing to buy it only
at a cheap price in the stock market. Now,
conversely, a high Price Earnings Ratio can
be bad because that means it's expensive and
not good value for investors. But a high Price
Earnings Ratio can also be good because we
must ask ourselves the question, “why are
people willing to buy it expensive?” Maybe
because it has good forecast. Maybe because
we're expecting good news in the near future.
Maybe because the company or people are expecting
their profit and sales to go up.
So, why are people willing to buy it expensive?
Now, sometimes you might find a very good
stock with a low PE Ratio. So, why is it cheap
even if it has a low Price Earnings Ratio?
Well, maybe because the stock has not had
many news reports on how good the stock is.
That happens. Sometimes, the stock might have
a high Price Earnings Ratio even if the forecasts
are not too good. Why? Simply because it's
a popular share of stock. Everyone talks about
it. It’s always in the news. The CEO is
a celebrity. Okay. Something like that. And
because of that, a lot of people buy it even
if it does not have good prospect or good
forecast. That might have a high PE Ratio.
The best, of course, is to buy a stock with
a low Price Earnings Ratio with good forecast
but which is selling cheap simply because
it is not hot in the news right now. That
would be a better formula for buying stocks,
not simply because it has high Price Earnings
Ratio or low Price Earnings Ratio.
Okay. Now, how do we analyze the Price Earnings
Ratio traditionally? The first is to compare
the historical Price Earnings Ratio of this
company with the Price Earnings Ratio now.
So, the Price Earnings Ratio is higher now
than in the previous years. Then, this indicates
that the company's more expensive now than
before. This could indicate lousier value
for investors. Or it could indicate good earnings
estimates in the future. And that's why it's
selling expensive. Now, if the Price Earnings
Ratio is lower than in previous years, this
indicates that the company's cheaper than
before. Again, this could indicate better
value to investors or could indicate bad earnings
forecast or sometimes has to do with the overall
stock market. Sometimes, most stocks, in general,
tend to have Price Earnings Ratio. And that's
when we're in a boom phase, in a boom and
bust. When the economy is good, a lot of people
are buying stocks. The Price Earnings Ratios
of most companies, in general, go up. When
the economy is bad, people are feeling negative
about the stock market. Then the Price Earnings
Ratios, even of good companies, tend to go
down. You can find better value when buying
stocks at that time.
But anyway, in this case, for traditional
analysis number 1, if your Price Earnings
Ratio is lower than last year's, then it indicates
that your company's cheaper than before. So
this could indicate better value or it could
indicate bad earnings forecast or any other
negative sentiment in the market. Traditional
analysis number 2 is to compare the Price
Earnings Ratio of this company with that of
other similar companies. Like if it's a bank,
you also want to compare the Price Earnings
Ratio of your company to another bank. So,
if your Price Earnings Ratio is higher than
theirs, then this indicates that your company
is relatively more expensive than other similar
companies based on earnings. This could indicate
bad value to investors or it could indicate
good forecast. That's why people are willing
to buy it higher. If your Price Earnings Ratio
is lower than theirs, then this indicates
that this company is relatively cheap compared
to other companies based on earnings. This
could indicate good value or bad forecast
for the company.
Alright! So, therefore, if available, I would
recommend a better indicator. If you're actually
investing in stocks, a better indicator would
be what we call the Forward PE or the Forward
Price Earnings Ratio, where the number you
input here is not based on last year's earnings
but it's based on next year's estimated future
earnings. Of course, that's not yet sure,
but it's just based on an estimate. So, you
find the future estimated earnings for next
year and you put it together in this ratio
over here. And you get what we call a Forward
PE.
Alright! So, I hope you learned something.
Remember to share it if you like it. Please
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day and goodbye.
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