Share price: 50,00 €
Earnings per Share: 4,00 €
Price-to-Earnings Ratio: 50 / 4 = 12,5
Based on the current earnings situation it would therefore take 12.5 years until the current stock market price of one share is reached.
This relation shows clearly that price-earnings ratios will increase with increasing stock market prices at constant earnings. On the other side price-earnings ratios will decrease if the stock market price of one share decreases and/or if earnings rise.
The significance of the price-earnings ratio is limited during periods with a loss. Furthermore past and historic earnings do not always allow a forecast for the future development of such earnings. Earnings of the past can not just simply be assumed on the same level for the future. Finally investors should always keep in mind that the liquidation of hidden reserves in the balance sheet can influence the price-earnings ratio at least in one financial period.
In this context one might also like to consider the reciprocal value of the price-earnings ratio. This would be in this case the earnings per share divided by the current stock market price of one share. The resulting value is also known as the earnings yield. The earnings yield is very often compared to the market interest rate due to the fact that investors are aiming for returns on investments. This underlines also the influence of central banks on price-earnings ratios. If the central bank lowers the interest rates, stock market prices will rise with some delay in time and also price-earnings ratios will go up. On the other side, lower interest rates will lead into lower stock market prices and consequently also lead into lower price-earnings ratios.
Alternative Price-Earnings Ratio Calculations
Sometimes price-earnings ratio are being calculated and published for whole sectors or indices. Such key performance figures are then considered a benchmark for the general evaluation of one sector or one index regarding the value of the containing single companies. The longterm average price-earnings ratio of the German for example is 19.
It is of outstanding importance to announce exactly which kind of stock market price will be taken into consideration for the calculation of the price-earnings ratio. Possible options are the current stock market price, the average stock market price of a certain period of time or the last stock market price at the last trading day of one year.
Finanzoo.de calculates the price-earnings ratio based exclusively on realized earnings / profits and does not take expected earnings of the future into consideration.
For the calculation of the FScore finanzoo.de takes the average earnings of the last three years and multiplies it with an empiric factor. The resulting value is put in relation to the present stock market price of one share. If the deviation to the current stock market price remains below 30% one share is considered as fair valued.
If the average earnings of the last 3 years have been negative no calculation can be executed. In order to still be able to calculate a value for the FScore in such cases the price-to-sales ratio will be used instead.
The FScore considers the price-to-earnings ratio with a value of 15%.