Price to Earnings Ratio (P/E Ratio)

The price-to-earnings ratio, or P/E ratio, is a financial measure that is calculated by dividing the current market price of a stock by the company's earnings per share (EPS).

 

TTM P/E and LYR P/E

 

The TTM P/E ratio is the P/E ratio based on the company's earnings over the last 12 months (also known as the trailing 12 months or TTM). The LYR P/E ratio is the P/E ratio based on the company's earnings over the last year (also known as the last year or LYR).

 

The TTM P/E ratio is considered to be a more current and relevant measure of a company's valuation because it is based on the company's most recent earnings. The LYR P/E ratio, on the other hand, is based on the company's earnings from a year ago and may not be as reflective of the company's current financial performance.

 

It's important to note that P/E ratios should be considered in the context of a company's industry and the overall market. A high P/E ratio may indicate that the market has high expectations for the company's future growth, while a low P/E ratio may indicate that the market has low expectations for the company's future growth. However, P/E ratios should not be used in isolation and should be considered alongside other financial metrics in order to get a complete picture of a company's financial health and performance.

 

Examples of how TTM and LYR P/E Ratios

 

Here is an example of how TTM and LYR P/E ratios can differ for two companies:

 

Company X has a TTM EPS of $2 and a stock price of $20. Its TTM P/E ratio is 10 ($20/$2).

Company Y has a TTM EPS of $4 and a stock price of $40. Its TTM P/E ratio is 10 ($40/$4).

Company X has a LYR EPS of $3 and a stock price of $30. Its LYR P/E ratio is 10 ($30/$3).

Company Y has a LYR EPS of $5 and a stock price of $50. Its LYR P/E ratio is 10 ($50/$5).

 

In this example, both Company X and Company Y have the same TTM P/E ratio, but their LYR P/E ratios are different. This illustrates that the TTM P/E ratio and LYR P/E ratio can be different for the same company, even if the market price and earnings are the same. It's important to consider both the TTM P/E ratio and the LYR P/E ratio in order to get a complete picture of a company's financial performance and valuation.

 

P/E Re-rating and Derating

 

A P/E ratio re-rating occurs when a company's P/E ratio changes significantly due to a change in its stock price or earnings. This can happen for a variety of reasons, such as a change in the company's financial performance, investor sentiment, or industry conditions.

 

A P/E ratio derating occurs when a company's P/E ratio falls significantly. This can happen if the company's earnings decline, if its stock price falls, or if the market becomes less optimistic about the company's prospects.

 

Earnings per Share (EPS)

 

Earnings per share (EPS) is a financial measure that represents the portion of a company's profit that is allocated to each outstanding share of common stock. It is calculated by dividing the company's net income by the number of outstanding shares of common stock.

 

EPS is an important metric for investors because it helps them understand the profitability of a company and how much they are earning on their investment. A company with a high EPS is generally considered to be more profitable than a company with a low EPS.

 

EPS is often used in conjunction with the price-to-earnings ratio (P/E ratio) to help investors evaluate the relative value of a company's stock. The P/E ratio is calculated by dividing the market price of the stock by the EPS. A high P/E ratio may indicate that the market has high expectations for the company's future growth, while a low P/E ratio may indicate that the market has low expectations for the company's future growth.  However, it's important to note that P/E ratios should be considered in the context of a company's industry and the overall market, and should not be used in isolation.

 

Basic EPS and Diluted EPS

 

Both diluted earnings per share (EPS) and basic EPS are financial metrics that are used to measure the profitability of a company. Basic EPS is calculated by dividing the company's net income by the number of outstanding shares of common stock. Diluted EPS takes into account the potential dilution of a company's earnings that may result from the exercise of outstanding options, warrants, and other dilutive securities.

 

Basic EPS is generally considered to be a more conservative measure of a company's profitability because it does not take into account the potential dilution of earnings that may result from outstanding options and other securities. Diluted EPS, on the other hand, provides a more realistic representation of a company's earnings because it takes into account the potential impact of dilutive securities on earnings.

 

Both basic EPS and diluted EPS can be useful metrics for investors, but diluted EPS is generally considered to be the more accurate and relevant measure of a company's profitability. It's important to consider both basic EPS and diluted EPS when evaluating a company's financial performance.

 

Looking to start your investment journey

 

Investing can seem intimidating at first, but with the right guidance and a little bit of knowledge, it can be a powerful way to grow your money and achieve your financial goals.

 

If you are new to investing and feeling a little bit unsure about where to start, enquire with our financial advisors to guide you through the process and helo you every step of the way.

 

Our approach is simple: we take the time to get to know you and understand your financial goals, and then we help you create a personalized investment plan that's tailored to your needs. We believe that the more you understand about investing, the more confident you'll feel making your own financial decisions.

 

Take the first step towards financial success and contact us today!


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