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The ratio is so popular because it's simple, it's effective, and, tautologically, because everyone uses it.
Stock Price Calculator for Common Stock Valuation
Let's go through the basics of valuing a company's stock with this ratio and work out how this calculation can be useful to you. Calculating the value of a stock The formula for the price-to-earnings ratio is very simple:. We can rearrange the equation to give us a company's stock price, giving us this formula to work with:.
To calculate a stock's value right now, we must ensure that the earnings-per-share number we are using represents the most recent four quarters of earnings. This is called the company's trailingmonth earnings per share, and it can be found for most all public companies with a quick Internet search. Your broker should also have this information.
How to Calculate Market Price Per Share
It's just that easy. Your result will always match the stock's current price, which doesn't help you invest for the future.
For example, if the company has a major new product release coming next quarter, you could predict how that release may increase its earnings per share going forward. Most likely, your research will indicate a range of possible earnings per share predictions based on how well the product release goes. You could also analyze the company's competitors to see how their current price-to-earnings ratio compare.
In the hypothetical example here, the first column shows the possible earnings per share numbers and the top row shows possible price-to-earnings ratios. The middle section of the chart shows what the stock price would be under each combination based on the aforementioned formula. For a real analysis, the first column would be based on your analysis of the company's future earnings per share, and the top row would be based on your research of the competition.
This matrix tells you not just what the stock price would be in the specific outcome your research predicts, but also the stock price for a range of other outcomes. It's impossible to predict the future, so there is no guarantee that any stock will perform as you predict.
However, using the price-to-earnings ratio to value a company's stock in a variety of different situations is an effective way to understand the implications for all sorts of various outcomes. It's an easy and quick exercise to include in your stock research practices to take your investing to the next level.
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Market Value Of Equity
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Personal Finance Credit Cards Best Credit Cards of Best Credit Card Sign-Up Bonuses Best Balance-Transfer Credit Cards Best Travel Credit Cards Best Cash-Back Credit Cards Best No-Annual-Fee Credit Cards Best Small Business Credit Cards. How to Calculate the Value of Stock With the Price-to-Earnings Ratio A simple and effective method for understanding a stock's value now and in the future.
Calculating the value of a stock The formula for the price-to-earnings ratio is very simple: How to Invest in Stocks. Prev 1 2 3 4 Next.