Price per earning or P/E ratio is another useful financial indicator that you can use to analyse your stocks. It basically tells how many years it takes for you to earn back one share price that you buy. 2 assumptions are being made here for simplification:
- You do not sell your stock
- The stock dividend equals to the earning per share.
Note 1: For more information on EPS, you can read my previous post: Using EPS to Analyse Stock
The earning per share should be based on yearly and NOT quarterly. Another important thing about this EPS is, it is better to use the latest EPS rather than the one you get in the annual report unless you really don’t have a choice or you simply lazy. The technical term for this is called “Trailing Twelve Months” or TTM which means the most recently past 12 months.
Where to get P/E ratio data?
If you do not want to calculate yourself and would like to get the latest information about P/E ratio, you can just search for P/E ratio (TTM). Usually when you see P/E ratio without mentioning the “TTM”, it means the EPS is based on the last fiscal year. For example when I look at my stock trading online account on a particular stocks, the P/E ratio information doesn’t have the TTM. This means the P/E ratio is based on the last fiscal year. In short:
- P/E ratio (TTM) for AiraSia = 13.60
- P/E ratio (TTM) for MAS = N/A
- P/E Ratio for Airasia Bhd = 9.56 (Under-valued)
- P/E Ratio for Mas Bhd = 18.67 (Over-priced)
Earning per share tells you the company performance but we need to study their track record by looking at the past years and look at the EPS growth instead. After that, you can perform use the price per earning ratio or P/E ratio to compare companies that are in the same industry. The lowest P/E ratio basically means it is under-valued and ot is good to buy. If both EPS and P/E ratio analysis show positive for that particular stock (e.g. in this case is Airasia), that means based on the fundamental analysis, we should buy that share
The challenging part is if you get good EPS but bad P/E ratio and not both. Which one has the higher weightage? I will probably wait until the stock price goes down first since the EPS is still good. If EPS is bad, I probably won’t got for this stock at all. Does this make sense?
P/S: I’m still learning but I find this EPS and P/E ratio analysis are pretty awesome but require some amount of works before you decide to buy the share. I welcome you to share your investing experience here especially you are the fundamental investor. Other than EPS and P/E ratio, what else do you look at?