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Am I correct in understanding that as, for 62 dollars worth of shares I buy 1 dollar of the earnings?

WiseWeasel 14y ago
No; for $62 of shares, you buy $62 of shares. The Price-to-Earnings ratio is the ratio of the total outstanding share value to the company's income in the previous year. Facebook's income in 2011 was $1B. At the IPO share price of $38, the value of the total outstanding shares was around $100B, giving them a P/E ratio of 100 ($100B / $1B = 100). Now that the share price has fallen by half, the P/E ratio is closer to 50. The P/E ratio is used to give an indication of how highly a company's stock is valued in relation to the profit they make. Companies with a high P/E ratio are typically expected by shareholders to report higher profits in the future. Those with a low ratio are expected to remain flat or contract. For high-growth companies, like triple-digit growth, a P/E ratio between 50-100 is not unheard of, but is relatively high, and an indication of an exceptionally high degree of confidence in the company. A ratio in the 20-40 range is more common for growing companies. 10 and under typically indicates a relative lack of faith in growth prospects by investors. There are many more factors to consider than relation to last year's profits when determining the value of a stock, but this is a very commonly used metric.
dave_sullivan 14y ago
Yes, that's the general idea. Your $62 today theoretically gives you some right to $1 per year of earnings + every other year after that, taking into account earnings growth (So, the case for high P/E ratios is that earnings growth will be fast enough that that $1 quickly turns into $2 each year) Apple's P/E, for more comparison, is at 16. But more specifically, since facebook doesn't pay a dividend, you won't see that $1 each year because Facebook will re-invest their earnings into their business. You're essentially saying that facebook will invest that $1 into growing their earnings faster than you could generate a similar return by investing in something else. When a company reaches a point where the market is mature and further investment will likely not result in a earnings growth rate that beats similar alternative investments, it pays a dividend and the stock actually becomes a cash stream, which you can then re-invest or spend freely.
marvin 14y ago
Yes. A P/E rate this high implies that the market believes Facebook will considerably increase its earnings in the future. The lower P/E ratio of Google and Apple implies that the market does not believe in significant earnings growth in the future. You rarely buy a stock looking only at the company's present situation. For instance, Ford for a long time had a price/assets value smaller than 1, which meant that one dollar of Ford stock gave you more than 1 dollar's worth of Ford's assets. But during this time, Ford was also losing a lot of money.

No; for $62 of shares, you buy $62 of shares. The Price-to-Earnings ratio is the ratio of the total outstanding share value to the company's income in the previous year. Facebook's income in 2011 was $1B. At the IPO share price of $38, the value of the total outstanding shares was around $100B, giving them a P/E ratio of 100 ($100B / $1B = 100). Now that the share price has fallen by half, the P/E ratio is closer to 50. The P/E ratio is used to give an indication of how highly a company's stock is valued in relation to the profit they make. Companies with a high P/E ratio are typically expected by shareholders to report higher profits in the future. Those with a low ratio are expected to remain flat or contract. For high-growth companies, like triple-digit growth, a P/E ratio between 50-100 is not unheard of, but is relatively high, and an indication of an exceptionally high degree of confidence in the company. A ratio in the 20-40 range is more common for growing companies. 10 and under typically indicates a relative lack of faith in growth prospects by investors. There are many more factors to consider than relation to last year's profits when determining the value of a stock, but this is a very commonly used metric.

dave_sullivan 14y ago

Yes, that's the general idea. Your $62 today theoretically gives you some right to $1 per year of earnings + every other year after that, taking into account earnings growth (So, the case for high P/E ratios is that earnings growth will be fast enough that that $1 quickly turns into $2 each year) Apple's P/E, for more comparison, is at 16. But more specifically, since facebook doesn't pay a dividend, you won't see that $1 each year because Facebook will re-invest their earnings into their business. You're essentially saying that facebook will invest that $1 into growing their earnings faster than you could generate a similar return by investing in something else. When a company reaches a point where the market is mature and further investment will likely not result in a earnings growth rate that beats similar alternative investments, it pays a dividend and the stock actually becomes a cash stream, which you can then re-invest or spend freely.

marvin 14y ago

Yes. A P/E rate this high implies that the market believes Facebook will considerably increase its earnings in the future. The lower P/E ratio of Google and Apple implies that the market does not believe in significant earnings growth in the future. You rarely buy a stock looking only at the company's present situation. For instance, Ford for a long time had a price/assets value smaller than 1, which meant that one dollar of Ford stock gave you more than 1 dollar's worth of Ford's assets. But during this time, Ford was also losing a lot of money.