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    The price earnings ratio, also called the P/E ratio, is calculated by dividing a stock's market price per share by the company's earnings per share. It indicates what the market is willing to pay for each dollar of current earnings. Investors use the P/E ratio to evaluate a stock's fair market value based on its past and predicted future earnings, though other factors also influence stock prices. The ratio helps investors determine how many times earnings they are willing to pay for a stock. A higher P/E suggests higher expected future growth and typically higher risk. Dilutive acquisitions that decrease earnings per share should generally be avoided unless strategic benefits offset the dilution of shareholder value.

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    Aaaa 1

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    The price earnings ratio, also called the P/E ratio, is calculated by dividing a stock's market price per share by the company's earnings per share. It indicates what the market is willing to pay for each dollar of current earnings. Investors use the P/E ratio to evaluate a stock's fair market value based on its past and predicted future earnings, though other factors also influence stock prices. The ratio helps investors determine how many times earnings they are willing to pay for a stock. A higher P/E suggests higher expected future growth and typically higher risk. Dilutive acquisitions that decrease earnings per share should generally be avoided unless strategic benefits offset the dilution of shareholder value.

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    The price earnings ratio, also called the P/E ratio, is calculated by dividing a stock's market price per share by the company's earnings per share. It indicates what the market is willing to pay for each dollar of current earnings. Investors use the P/E ratio to evaluate a stock's fair market value based on its past and predicted future earnings, though other factors also influence stock prices. The ratio helps investors determine how many times earnings they are willing to pay for a stock. A higher P/E suggests higher expected future growth and typically higher risk. Dilutive acquisitions that decrease earnings per share should generally be avoided unless strategic benefits offset the dilution of shareholder value.

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    44 views2 pages

    Aaaa 1

    Uploaded by

    Muhammad Hassan
    The price earnings ratio, also called the P/E ratio, is calculated by dividing a stock's market price per share by the company's earnings per share. It indicates what the market is willing to pay for each dollar of current earnings. Investors use the P/E ratio to evaluate a stock's fair market value based on its past and predicted future earnings, though other factors also influence stock prices. The ratio helps investors determine how many times earnings they are willing to pay for a stock. A higher P/E suggests higher expected future growth and typically higher risk. Dilutive acquisitions that decrease earnings per share should generally be avoided unless strategic benefits offset the dilution of shareholder value.

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    Price earning ratio

    The price earnings ratio, often called the P/E ratio or price to earnings ratio, is a
    market prospect ratio that calculates the market value of a stock relative to its
    earnings by comparing the market price per share by the earnings per share. In
    other words, the price earnings ratio shows what the market is willing to pay for a
    stock based on its current earnings.
    Investors often use this ratio to evaluate what a stock's fair market value should be
    by predicting future earnings per share. Companies with higher future earnings are
    usually expected to issue higher dividends or have appreciating stock in the future.
    Obviously, fair market value of a stock is based on more than just predicted future
    earnings. Investor speculation and demand also help increase a share's price over
    time.
    The PE ratio helps investors analyze how much they should pay for a stock based on
    its current earnings. This is why the price to earnings ratio is often called a price
    multiple or earnings multiple. Investors use this ratio to decide what multiple of
    earnings a share is worth. In other words, how many times earnings they are willing
    to pay.

    Formula
    The price earnings ratio formula is calculated by dividing the market value price per
    share by the earnings per share.
    Price earning ratio= market value price per share
    Earning per share

    This ratio can be calculated at the end of each quarter when quarterly financial
    statements are issued. It is most often calculated at the end of each year with the
    annual financial statements. In either case, the fair market value equals the trading
    value of the stock at the end of the current period.
    The earnings per share ratio is also calculated at the end of the period for each
    share outstanding. A trailing PE ratio occurs when the earnings per share is based
    on previous period. A leading PE ratios occurs when the EPS calculation is based on
    future predicted numbers. A justified PE ratio is calculated by using the dividend
    discount analysis.

    Dilutive Acquisition

    A takeover transaction that will decrease the acquirer's earnings per share (EPS) if
    additional shares are issued to pay for the acquisition.
    Dilutive acquisitions decrease shareholder valueand should thus be avoided, unless
    the strategic value of the acquisition is expected to cause a sufficient increase in
    EPS later years. An acquisition is only a good deal if the acquirer can derive more
    value from the acquisition than it pays out.
    Price earning ratio affects market price confusion in the financial press between
    stock price and what constitutes current stock value has led to common ratios such
    as the price earnings ratio being used to measure current stock value.
    The book value of stock is also used as the denominator of the price book ratio as a
    measure of fair value.
    These ratios provide a 'relative' measure of stock values only, and are useful to
    make (relative) comparisons between similar companies and with the market as a
    whole.
    However, they do not provide what I call an 'absolute' measure of stock values
    that is based on the economics of the company itself, and not on its current price.

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