Getting to grips with PERs

Like any good mathematical formula, the price-earnings ratio, or PER, is simple, but powerful.
In this publication, you try to shelter both unnecessary mathematics, language and financial-as we can talk, but the price-to - earnings ratio, or PER, it is an important concept to understand. Doing so will help you exit this publication more and more from their investments. We can begin, simply because the PER is exactly what its name suggests: a ratio of the price of a share to earnings does. A simple analogy is rental property. If you have a property worth $ 200000 and that earns US $ 10000 a year in income, income from leasing is 5% ($ 10000 divided by $ 200,000). This method of calculating productivity divide income (E) by the value of the property (P).
If take the opposite, which is divided by PE, we get a multiple of 20 times ($ 200000 divided by $ 10,000). Thus, the PER is the opposite of rental income. If the same property had an income of $ 15000, the rental income would be 7.5% and the PER would 13.
Market PER expectations
You can use to compare different investments. For example, if a property produces 5% (PER of 20) and property B yields 7.5% (PER of 13), then B is cheaper property, everything else is equal. But if the rent on the property was likely to grow faster than income in the property B, then everything else would not be equal. In this case, a property can be better, despite its higher PER. Everything depends, of course, on how fast the rent will grow.
Turning for businesses, we can compare the PERs of Coles (currently 22) and Woolworths (currently 24) to see what it is cheaper on the face of it (Coles), E, that therefore the market is expecting a higher growth (Woolworths). This makes intuitive sense to us, given Woolies & 39; track record and prospects.
From the formula, it is easy to identify the two components of PER, the & 39; price & 39; or & 39; & P 39, and & 39; revenue & 39; or & 39; E & 39;. This is where things start to get a little more complicated, because there are so many different ways to calculate a PER as there are different ways of calculation of income (and then some more).
Visit The Intelligent Investor for the rest of this article on the price earning ratios to find out more about buying shares.



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