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> 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
by 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 agoInstead 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 agoIn 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"