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The Price of a Conservative Investment
One further aspect of any stock investment has to do with the price earnings ratio. What is price earnings ratio? Price earnings ratio also known as P/E or PER is the quotient between the price of the stock market action and the earnings per share. On average in order to calculate the price earnings ratio, the benefit that is hoped for throughout the course of the year is used, although it is also common to calculate it with last benefit. This is used simplistically to value a company or establish what a company's stock should be worth.
Price earnings ratio tells us how many dollars we pay for each dollar of benefit that the company promises. In theory, the less we pay the better it is. The price earnings ratio is also the inverse of the profit that the action promises, since the earnings per share are the hoped for benefit of the action (assuming the BPS is constant throughout the years) and is also the inverse of the PER. In other words, if we buy a share of a price earnings ratio of 10, we are hoping for a yield of 10 by 100, if we buy it from a price earnings ratio of 20, we will be hoping for a yield of 5 by 100.
The price earnings ratio gives us a first idea about how expensive or cheap a share is or an entire stock. Habitually, the agents compare the price earnings ratio of shares from the same sector and from the same stock to see which is the cheapest. The price earnings ratio is also used along with a stock in order to compare it with another and see which market is more attractive.
Price earnings ratio is simply instrument of appraisal of stock; therefore, to start to understand it we need to go back to the first principles of appraisal of stock based on the discount of flow and in order to do that we first need to talk about the value of money at the time.