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HTML <html> <head> <title>Getting to grips with PERs</title> </head> <body> <h1>Getting to grips with PERs</h1> <div class="info">Author: <a href="author_1_95012.html">Melanie</a></div><div class="body">Like any good mathematical formula, the price-to-earnings ratio, or PER, is simple yet powerful.<br /> <br /> In this publication we try to shelter you from as much unnecessary mathematics, jargon and financial-speak as we can, but the price-to-earnings ratio, or PER, is an important concept to understand. Doing so will help you get more out of this publication and more from your investments.<br /> We can start off quite simply, because the PER is exactly what its name suggests: a ratio of the price of a share to the earnings it makes. A simple analogy is rental property. If you own a property worth $200,000 and it earns $10,000 a year in rent, the rental yield is 5% ($10,000 divided by $200,000). This calculation for yield divides rent (the E) by the value of the property (the P).<br /> <br /> If we take the opposite, that is P divided by E, we get a multiple of 20 times ($200,000 divided by $10,000). Thus, the PER is the opposite of the rental yield. If the same property had a rental income of $15,000, the rental yield would be 7.5% and the PER would be 13.<br /> <br /> Market expectations<br /> <br /> You can use the PER to compare different investments. For example, if property A yields 5% (PER of 20) and property B yields 7.5% (PER of 13) then property B is cheaper, everything else being equal. But if the rent on property A was likely to grow more quickly than the rent on property B, then everything else would not be equal. In this case, property A might be better value despite its higher PER. It all depends, of course, on how quickly the rent is going to grow.<br /> <br /> Turning to companies, we can compare the PERs of Coles (currently 22) and Woolworths (currently 24) to see which is cheaper on the face of it (Coles), and from which, therefore, the market is expecting more growth (Woolworths). That makes intuitive sense to us, given Woolies' track record and prospects.<br /> <br /> From the formula, it's easy to identify the two components of the PER, the 'price' or 'P' and 'earnings' or 'E'. This is where things start to get a bit more complicated, because there are as many different ways of calculating a PER as there are different ways of calculating earnings (and then a few more).<br /> <br /> Visit <a href="http://www.intelligentinvestor.com.au" >The Intelligent Investor</a> for the rest of this article on the <a href="http://www.intelligentinvestor.com.au/articles/215/Getting-to-grips-with-PERs-.cfm?articleid=10002604" >price earning ratios</a> to find out more on <a href="http://www.intelligentinvestor.com.au/valueInvesting.cfm" >buying shares</a>.</div> <div class="source">Article Source: <a href="http://www.articlealley.com/article_187144_19.html">http://www.articlealley.com/article_187144_19.html</a></div> <div class="author"> <div class="authorBio"></div> </author> </body> </html>
Text Getting to grips with PERs Author: Melanie Like any good mathematical formula, the price-to-earnings ratio, or PER, is simple yet powerful. In this publication we try to shelter you from as much unnecessary mathematics, jargon and financial-speak as we can, but the price-to-earnings ratio, or PER, is an important concept to understand. Doing so will help you get more out of this publication and more from your investments. We can start off quite simply, because the PER is exactly what its name suggests: a ratio of the price of a share to the earnings it makes. A simple analogy is rental property. If you own a property worth $200,000 and it earns $10,000 a year in rent, the rental yield is 5% ($10,000 divided by $200,000). This calculation for yield divides rent (the E) by the value of the property (the P). If we take the opposite, that is P divided by E, we get a multiple of 20 times ($200,000 divided by $10,000). Thus, the PER is the opposite of the rental yield. If the same property had a rental income of $15,000, the rental yield would be 7.5% and the PER would be 13. Market expectations You can use the PER to compare different investments. For example, if property A yields 5% (PER of 20) and property B yields 7.5% (PER of 13) then property B is cheaper, everything else being equal. But if the rent on property A was likely to grow more quickly than the rent on property B, then everything else would not be equal. In this case, property A might be better value despite its higher PER. It all depends, of course, on how quickly the rent is going to grow. Turning to companies, we can compare the PERs of Coles (currently 22) and Woolworths (currently 24) to see which is cheaper on the face of it (Coles), and from which, therefore, the market is expecting more growth (Woolworths). That makes intuitive sense to us, given Woolies' track record and prospects. From the formula, it's easy to identify the two components of the PER, the 'price' or 'P' and 'earnings' or 'E'. This is where things start to get a bit more complicated, because there are as many different ways of calculating a PER as there are different ways of calculating earnings (and then a few more). Visit The Intelligent Investor for the rest of this article on the price earning ratios to find out more on buying shares. Article Source: http://www.articlealley.com/article_187144_19.html About the Author:
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