Stocks - 1

Stock Trading Terminology

P/E Ratio: it is the ratio of Price or market value of a share and Earnings per share.

P/E = Price of a share / Earnings per share

For example, if a stock is trading at 50, and the earnings per share of the stock for last year is 2.5, then the PE ratio would (50/2.5) = 20.

Variations:

Trailing PE = Price of share / EPS of last 4 quarters

Forward PE = Price of share / Estimated EPS for next 4 quarters

Interpretation of PE ratio:

PE Ratio indicates if a stock is undervalued or overvalued.

PE ratio should be used to compare companies in the same sector.

A higher PE indicates a higher growth potential.

Companies that do not have PE ratio are not earning (and not expected to) earn anything.

Historically, following is the interpretation of PE ratio.
NA - means the stock does not earn anything, or negative earning. Hence, PE ratio is cannot be determined.
0-10 - means the company is undervalued, and its earningsis likely to go down.
11-17 - this is considered as a fair, stable range of PE.
18-25 - the company is overvalued. Earnings have gone up substancially, in the recent times.
> 25 - means the investors have very high expections about the growth of this company.

It is advisable to compare the PE ratio of stock to the PE ratio of other stocks in the same industry and sector. Also, it should be compared to the overall market, for example, S&P 500 or some kind of a market index.

Price to Sale Ratio: It is the ratio of price per share, to the revenue (or sales) per share.

PS ratio < 1 makes it more attractive.

Price to Book Value Ratio:

Book value means total assets – intangible assets and liabilities.

PB ratio = Price of share / total assets – intangible assets and liabilities

Usually, all these ratios are used to compare companies in the same sector.

PEG Ratio: It is the ratio of PE of a stock to Annual EPS growth.

Ideally, PEG ratio should be < 1.