Price-to-Earnings:
P/E ratio (Price-to-Earnings
ratio) of a share (also called its "P/E", or simply
"multiple") is the market price of that share divided by the annual
Earnings per Share (EPS).
The P/E ratio can be regarded as being expressed in years:
the price is in currency per share, while earnings are in currency per share
per year, so the P/E ratio shows the number of years of earnings which
would be required to pay back the purchase price, ignoring inflation,
earnings growth and the time value of money.
For example, if Apple is
currently trading at $574 a share and earnings over the last 12 months were $41.00
per share, the P/E ratio for the stock would be 14 ($574/$41).
EPS is usually from the
last four quarters (trailing (ttm) P/E),
but sometimes it can be taken from the estimates of earnings expected in the
next four quarters (projected or forward
P/E).
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.
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 14, the
interpretation is that an investor is willing to pay $14 for $1 of current
earnings.
Since 1900, the average P/E ratio for the S&P 500 has ranged from 4.78 in Dec 1920 to 44.20 in Dec 1999. However, except for some brief periods, during 1920-1990 the market P/E ratio was mostly between 10 and 20.
Price-to-Book:
The Price-to-Book ratio, or P/B ratio, is a
financial ratio used to compare a company's current market price to its book
value. The calculation can be performed
in two ways, but the result should be the same each way. In the first way, the
company's market capitalization can be divided by the company's total book
value from its balance sheet. The second way, using per-share values, is to
divide the company's current share price by the book value per share (i.e. its
book value divided by the number of outstanding shares).
Industries that require more infrastructure capital (for
each dollar of profit) will usually trade at P/B ratios much lower than, for
example, consulting firms. P/B ratios are commonly used to compare banks,
because most assets and liabilities of banks are constantly valued at market
values. A higher P/B ratio implies that investors expect management to
create more value from a given set of assets.
This ratio also gives some idea of whether an investor is
paying too much for what would be left if the company went bankrupt
immediately. For companies in distress, the book value is usually calculated
without the intangible assets that would have no resale value. In such cases,
P/B should also be calculated on a "diluted" basis, because stock
options may well vest on sale of the company or change of control or firing of
management.
Price-to-Sales:
Book value or carrying
value is the value of an asset according to its balance sheet account
balance. For assets, the value is based on the original cost of the asset less
any depreciation amortization or impairment costs made against the asset.
Traditionally, a company's book value is its total assets minus intangible
assets and liabilities. However, in
practice, depending on the source of the calculation, book value may variably
include goodwill, intangible assets, or both.
When intangible assets and goodwill are explicitly excluded, the metric
is often specified to be "tangible book value".
Price-to-Sales:
The price-to-sales ratio can vary substantially across industries;
therefore, it's useful mainly when comparing similar companies. Because it
doesn't take any expenses or debt into account, the ratio is somewhat limited
in the story it tells.
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