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  • Welcome to the Investors Trading Academy talking glossary of financial terms and events.

  • Our word of the day is “P/E RatioThe P/E ratio is an important indicator as

  • to how the investing market views the health, performance, prospects and investment risk

  • of a public company listed on a stock exchange (a listed company.

  • The P/E ratio is also a highly complex concept - it's a guide to use alongside other indicators,

  • not an absolute measure to rely on by itself. The P/E ratio is arrived at by dividing the

  • stock or share price by the earnings per share (profit after tax and interest divided by

  • the number of ordinary shares in issue). As earnings per share are a yearly total, the

  • P/E ratio is also an expression of how many years it will take for earnings to cover the

  • stock price investment. P/E ratios are best viewed over time so that

  • they can be seen as a trend. A steadily increasing P/E ratio is seen by the investors as increasingly

  • speculative because it takes longer for earnings to cover the stock price. Obviously whenever

  • the stock price changes, so does the P/E ratio. More meaningful P/E analysis is conducted

  • by looking at earnings over a period of several years. P/E ratios should also be compared

  • over time, with other company's P/E ratios in the same market sector, and with the market

  • as a whole. To calculate the P/E ratio:

  • 1. Establish total profit after tax and interest for the past year.

  • 2. Divide this by the number of shares issued. 3. This gives you the earnings per share.

  • 4. Divide the price of the stock or share by the earnings per share.

  • 5. This gives the Price/Earnings or P/E ratio.

Welcome to the Investors Trading Academy talking glossary of financial terms and events.

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