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PE Multiple

vikas (finance manager) (31 Points)

29 December 2008

What is PE Multiple. How is it calculated for various industries. PE Multiple for Wire and Cable Sector is 8. Could anyone guide me how is it calculated

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Rahul Gupta (CA Final Student) (1780 Points)
Replied 29 December 2008

Hello vikas....PE is price to earning ratio.

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay Rs20 for Re1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Source: Investopedia