5 ms·

I didn't understand P/E in 2005, and to be honest, I still don't fully. All I know is that it's been one of the terms being thrown around during the past 20 ye

I didn't understand P/E in 2005, and to be honest, I still don't fully. All I know is that it's been one of the terms being thrown around during the past 20 years as a reason why Apple's stock price will plummet to the ground and why I'm stupid for investing a large portion of net worth in it. At this point, my upside is immense so unless something absolutely catastrophic happens, odds are it seems I'll be having the last laugh.

Invictus0 3y ago
A genie gives you $1 per year in perpetuity. You are engaged in a bidding war to buy the genie and need to figure out your best price. The price you (the market) are willing to pay is the PE ratio.
- ryandrake 3y ago
  I mean, you know this, but this is only true for the most basic, dividend issuing non-growth company. Most of the genies don't give you anything per year. Their only value is the amount you can re-sell the genie for. EDIT: I guess I don't understand the "gives you $1" part if we're not talking about dividends.
  - OJFord 3y ago
    E is the company's earnings, not what it earns (or rather pays out to in that period) the shareholder. You (and maybe GP) seem to be confusing it with dividend yield?
    - blackoil 3y ago
      As an owner of company, valuation includes both profit withheld and dividend. Think you have 100% of a company with $100 in bank, it makes a profit of $20 and gives $5 as dividend and keeps $15 so now has $115 in account. So, owner got $5 in cash and the book value of company is now 115, and future valuations will reflect on that.
      - Sohcahtoa82 3y ago
        In an ideal world, yes. But in the real world, company valuation is an entirely subjective matter that prices in expected future growth or losses.
      - OJFord 3y ago
        Is it not clear from my parenthetical there that I understand that? > it earns (or rather pays out to in that period) the shareholder Comment I replied to was calling dividends, and only dividends, within a given year we're calculating P/E for no less, the company Earnings. That just isn't correct, whatever your views on valuation, shareholder ownership, and market efficiency.
  - bluecalm 3y ago
    Dividends don't matter. The companies just choose to buy stock from you with the profits instead of giving you cash. It's a smarter way because shareholders who want the cash can get it and those who don't can keep reinvesting profits while avoiding triggering tax events.
- bluecalm 3y ago
  Yeah but why should anyone care about earnings in this exact year? P/E might be useful for your thought experiment about the genie but it's completely useless as a tool to value companies.
  - oezi 3y ago
    What? You as the shareholder own the earnings and their use. Earnings thus either become dividends or become re-invested or are used to buy back shares. P/E is the central metric by which to judge stocks on a fundamental level.
    - bluecalm 3y ago
      What I am saying is that P/E is based on current year earnings. It can be quite low but the company is terrible (Intel) or quit big but the company is great but chose not to cash out yet (Amazon from a few years ago). You should care about how much the company is likely to make in coming decades. How much they have made in a current year is a useless metric for that. Profits are not the only thing either. Some assets give political power or power to shape the world. If NVidia made 0 it would still be very valuable because of that.
      - Invictus0 3y ago
        There is something called forward PE which takes into account the company's estimated growth.
  - blackoil 3y ago
    PE is only one number, you also look into growth as a factor to calculate PEG. So question now is for how long NVidia can grow at this crazy rate.
mettamage 3y ago
If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. Suppose the share price and the profit remain equal, then it takes 20 years for the earnings to "cover" the price of the share. That's the spirit of the P/E ratio, in my opinion. Others would simply tell you that it is: (share_price / earnings_of_that_year) == price_to_earnings_ratio Sometimes analysts will say that a P/E ratio is too low or too high based on what industry competitors trade at. So, perhaps there was a time where you read that an analyst and/or news outlet believed that the P/E of Apple was too high relative to its analyzed peers (e.g. Microsoft - assuming Microsoft was seen as a peer back then). Whether one should or shouldn't trade based on a particular P/E ratio has always been a matter of opinion.
- Sohcahtoa82 3y ago
  > If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. It's based on market cap, not share price. Market cap is a function of share price (It's just share price * number of outstanding shares), of course, but to just say it's share price leads to misunderstandings. Otherwise, that would imply that a stock split creates a multiplier of the P/E, ie, a company with a P/E of 20 does a 1:5 split ends up with a P/E of 100 post-split, and that's certainly not what happens.
  - Sohcahtoa82 3y ago
    Instead of silently downvoting, how about telling me why I'm wrong. P/E is defined usually defined as `share price / earnings per share`. Market cap is `share price * number of shares`. Via simple substitution, this means P/E is equal to `market cap / earnings`. But calling P/E `share price / earnings` is simply incorrect.
    - acchow 3y ago
      In finance circles, the word you are using for "earnings" is usually called "net income" (or "net income for common stockholders"). When people say "earnings" they usually are referring to "earnings per share". In short: net income is total, "earnings" is "per share"
nprateem 3y ago
It's a statistic that's easy to calculate and provides no information whatsoever whether to buy or sell.
badpun 3y ago
Right now, Apple's P/E is on par with SP500 average. It's not an overpriced stock (or, contrarily, the entire SP500 is overpriced).

Invictus0 3y ago

A genie gives you $1 per year in perpetuity. You are engaged in a bidding war to buy the genie and need to figure out your best price. The price you (the market) are willing to pay is the PE ratio.

ryandrake 3y ago
I mean, you know this, but this is only true for the most basic, dividend issuing non-growth company. Most of the genies don't give you anything per year. Their only value is the amount you can re-sell the genie for. EDIT: I guess I don't understand the "gives you $1" part if we're not talking about dividends.
- OJFord 3y ago
  E is the company's earnings, not what it earns (or rather pays out to in that period) the shareholder. You (and maybe GP) seem to be confusing it with dividend yield?
  - blackoil 3y ago
    As an owner of company, valuation includes both profit withheld and dividend. Think you have 100% of a company with $100 in bank, it makes a profit of $20 and gives $5 as dividend and keeps $15 so now has $115 in account. So, owner got $5 in cash and the book value of company is now 115, and future valuations will reflect on that.
    - Sohcahtoa82 3y ago
      In an ideal world, yes. But in the real world, company valuation is an entirely subjective matter that prices in expected future growth or losses.
    - OJFord 3y ago
      Is it not clear from my parenthetical there that I understand that? > it earns (or rather pays out to in that period) the shareholder Comment I replied to was calling dividends, and only dividends, within a given year we're calculating P/E for no less, the company Earnings. That just isn't correct, whatever your views on valuation, shareholder ownership, and market efficiency.
- bluecalm 3y ago
  Dividends don't matter. The companies just choose to buy stock from you with the profits instead of giving you cash. It's a smarter way because shareholders who want the cash can get it and those who don't can keep reinvesting profits while avoiding triggering tax events.
bluecalm 3y ago
Yeah but why should anyone care about earnings in this exact year? P/E might be useful for your thought experiment about the genie but it's completely useless as a tool to value companies.
- oezi 3y ago
  What? You as the shareholder own the earnings and their use. Earnings thus either become dividends or become re-invested or are used to buy back shares. P/E is the central metric by which to judge stocks on a fundamental level.
  - bluecalm 3y ago
    What I am saying is that P/E is based on current year earnings. It can be quite low but the company is terrible (Intel) or quit big but the company is great but chose not to cash out yet (Amazon from a few years ago). You should care about how much the company is likely to make in coming decades. How much they have made in a current year is a useless metric for that. Profits are not the only thing either. Some assets give political power or power to shape the world. If NVidia made 0 it would still be very valuable because of that.
    - Invictus0 3y ago
      There is something called forward PE which takes into account the company's estimated growth.
- blackoil 3y ago
  PE is only one number, you also look into growth as a factor to calculate PEG. So question now is for how long NVidia can grow at this crazy rate.

mettamage 3y ago

If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. Suppose the share price and the profit remain equal, then it takes 20 years for the earnings to "cover" the price of the share. That's the spirit of the P/E ratio, in my opinion. Others would simply tell you that it is: (share_price / earnings_of_that_year) == price_to_earnings_ratio Sometimes analysts will say that a P/E ratio is too low or too high based on what industry competitors trade at. So, perhaps there was a time where you read that an analyst and/or news outlet believed that the P/E of Apple was too high relative to its analyzed peers (e.g. Microsoft - assuming Microsoft was seen as a peer back then). Whether one should or shouldn't trade based on a particular P/E ratio has always been a matter of opinion.

Sohcahtoa82 3y ago
> If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. It's based on market cap, not share price. Market cap is a function of share price (It's just share price * number of outstanding shares), of course, but to just say it's share price leads to misunderstandings. Otherwise, that would imply that a stock split creates a multiplier of the P/E, ie, a company with a P/E of 20 does a 1:5 split ends up with a P/E of 100 post-split, and that's certainly not what happens.
- Sohcahtoa82 3y ago
  Instead of silently downvoting, how about telling me why I'm wrong. P/E is defined usually defined as `share price / earnings per share`. Market cap is `share price * number of shares`. Via simple substitution, this means P/E is equal to `market cap / earnings`. But calling P/E `share price / earnings` is simply incorrect.
  - acchow 3y ago
    In finance circles, the word you are using for "earnings" is usually called "net income" (or "net income for common stockholders"). When people say "earnings" they usually are referring to "earnings per share". In short: net income is total, "earnings" is "per share"

nprateem 3y ago

It's a statistic that's easy to calculate and provides no information whatsoever whether to buy or sell.

badpun 3y ago

Right now, Apple's P/E is on par with SP500 average. It's not an overpriced stock (or, contrarily, the entire SP500 is overpriced).