Price / earnings ratio

The price-earnings ratio ( PER ) ( english price / earnings ratio (PER) or P / E ratio ) is a frequently used economic indicator for the assessment of stocks . Here, the price of the share is set in relation to the earnings per share determined or expected for a comparable period. Mostly estimates of future profits are used for this.

${\displaystyle {\mbox{KGV}}={\frac {\mbox{Kurs einer Aktie}}{\mbox{Gewinn je Aktie}}}\!\ }$

Earnings per share are the total profit of the stock corporation (AG) divided by the number of shares issued.

Calculation examples

example 1

The current price of a share is € 50. In the last financial year a profit of € 4 per share was achieved. So it results:

${\displaystyle {\mbox{KGV}}={\frac {50}{4}}=12{,}5\!\ }$

This indicator shows the multiple of the results of the last financial year with which a share is valued on the stock exchange. Another way of looking at P / E is how many years it will take the company to generate the value of its shares in profit. In this case 12.5 years. If the company were to generate EUR 4 per share each year, it would take 12.5 years to generate EUR 50 (value of one share). That would be the case, for example, if the company had a profit of 16 million and issued 4 million shares. Consequently, for a share purchase, the lower the P / E ratio, the better.

Example 2

The current price of a share is € 50. Analysts expect earnings of € 5 per share for the coming financial year. So it results:

${\displaystyle {\mbox{KGV}}={\frac {50}{5}}=10\!\ }$

This indicator shows the multiple of its expected result with which a share is valued on the stock exchange.

interpretation

The price-earnings-ratio states how often the profit is included in the current price of a share or after how many years the profit has "paid" the price of the share. If the share above consistently generated a profit of four euros, a total of 50 euros would have come together after 12.5 years. The one euro increase shortens the period to ten years.

However, this interpretation no longer applies if the company writes losses. Because according to the definition, the P / E ratio is negative and the share would never be able to be “paid for” by the profit. In order to avoid this definition gap for values ​​smaller than 0, the capital flow (so-called cash flow ) is often calculated instead of the profit and the price-cash flow ratio KCV or KCF is used as an alternative .

P / E ratio according to the passage of time, country and industry

The price-earnings ratios fluctuate greatly depending on which countries, industries and years are considered. The reasons for the differences lie in the opportunities / risks of the papers and the level of interest rates and inflation.

In the German stock market in the 1970s and 1980s, P / E ratios of 8 were considered cheap and 15 were considered expensive. Since the 1990s, the KG ratios have fluctuated from 12 to 25 in relation to the overall market. For the 30 DAX stocks, the historical average P / E ratio is 14.6. In contrast, the P / E ratio at the end of 2008 was less than 10.

example

The figures from the 2014 annual report of Verbund AG , Vienna:

year	Earnings per share	Course at the end of the year	P / E ratio
2010	1.28	27.88	21.71
2011	1.02	20.74	20.25
2012	1.12	18.76	16.74
2013	1.67	15.52	9.30
2014	0.36	15.30	42.14

The sharp drop in earnings in 2014 is partly due to one-off charges, which must be taken into account when assessing the very high P / E ratio at the end of 2014.

Earnings yield and market rate

The return on earnings is the reciprocal of the P / E ratio expressed as a percentage, i.e. the earnings per share divided by the share price. The return on earnings can thus be interpreted as the return on the share. The P / E ratio of the stock market is also influenced by the prevailing interest rate . Since capital investors prefer investment opportunities with the highest profitability, there is a balance of profitability according to the law of supply and demand through so-called arbitrage transactions. The market value of the shares is accordingly adjusted so that the reciprocal value of the P / E ratio is based on the prevailing interest rate, adjusted for risk premiums.

If the central bank (an authority that usually has a significant influence on the general level of interest rates ) lowers the key interest rate , this leads to an increase in the P / E ratio with a certain time lag, all things being equal: the share prices rise. If the key interest rate is raised, the P / E ratio and thus the share price decrease accordingly.

In addition, the interest rate can influence the company's profits and thus also the P / E ratio through the cost of borrowing and reinforce the effect explained above.

Pitfalls

The P / E ratio is one of the most widely used ratios for stock valuation. However, its application is more complicated than the formula above suggests.

• Profits cannot simply be carried forward into the future. Business cycle fluctuations have to be taken into account as well as the effects of internal changes as well as changes in competition, in consumer behavior, interest rate developments and product life cycles , etc. Unpredictable factors such as weather and political decisions also play a role in some industries.
• One-time, extraordinary income and expenses are to be ignored, as are temporary fluctuations in the tax rate.
• If the estimate is uncertain, risk deductions must be made. If growth prospects are secure, however, a PER surcharge is possible.
• Profits can be manipulated within certain limits by creating and dissolving hidden reserves and by changing payment terms. An additional analysis of the cash flow can provide information on this.
• The P / E ratio describes the company's current earnings position, not future. It is possible that a company that makes little profit today because a lot of money goes into product development has better prospects for the future than a similar company that makes more profit but neglects product development.
• Stock companies show different profit figures in press releases, for example with or without non-group profit shares. Sometimes only earnings before taxes or before interest and taxes ( EBIT ) are mentioned. Earnings per share after deduction of interest expenses, taxes and non-group profit shares are relevant for the P / E ratio .
• It should also be taken into account whether the current share price was used in the calculation or an average value.

Shiller P / E ratio

The US economist and Nobel Prize winner Robert J. Shiller defined a 10-year P / E ratio as a variant for his empirical analysis of capital market prices in order to avoid special temporary influences in individual years. The calculation is based on the inflation-adjusted mean profit for the last ten years ( moving average ). This key figure is called the Shiller P / E 10 ratio , Shiller P / E or CAPE = cyclically adjusted PE ). The Shiller P / E ratio is used for long-term investment strategies because of its longer observation period in order to identify overvaluations such as speculative bubbles .

See also

• Price-to-book ratio
• Price-to-sales ratio
• Return

Web links

• Historical S&P 500 P / E Chart - Historical development of the US P / E ratio (1875 – today), based on the S&P 500
• Historical Price to 10 Year Inflation Adjusted Earnings Chart - Historical development of the US Shiller P / E ratio (1890 – today), based on the S&P 500

Individual evidence

1. ^ The KGV - "mother of all valuation numbers" . In: FAZ.net , accessed March 12, 2011
2. ↑ Return on earnings (balance sheet): Definition in the FAZ.NET stock exchange dictionary. In: FAZ.net. Retrieved January 28, 2019 . 
3. ↑ Shares Earnings Yield - Definition in Lexicon | börsennews.de. Retrieved January 28, 2019 . 
4. ↑ Earnings Return on Stocks - Formulas and Examples. In: Wertpapierdepot.net. Retrieved January 28, 2019 . 
5. ↑ P / E ratio and interest rate: This is how the two key figures are related. In: DIY Investor. Retrieved January 28, 2019 . 
6. ↑ P / E ratio: price / earnings ratio - explained in detail. Retrieved January 28, 2019 . 
7. ↑ Prof. Dr. Nikolaus KA Läufer: Stock bull market and stock market crashes due to incorrect valuation models. uni-konstanz.de, April 28, 2000, accessed on January 28, 2019 . 
8. ↑ Chapter 3.2 "KGV". In: uni-saarland.de. Retrieved January 28, 2019 . 
9. ↑ P / E 10 ratio. In: investopedia.com. Retrieved September 20, 2017 (English).