What is PE Ratio? | Stock Market Basics

hey welcome in thanks for joining our channel we're happy you stopped by to everything money as always i'm your handsome endeavor host seth i'm here with paul paul how are you my dear friend i am wonderful today we're talking about what is pe it may be confusing but there's a lot of new investors coming into the market this year and paul you know as much as we talk about how new money can be dangerous i'm i'm happy to see that people are committed people like yourself are committed to saving as opposed to spending your 20s uh maybe 20s and 30s and so um with all you people with all you new folks entering the market i stand here asking paul your questions and the first one today we want to go over is what is p e ratio this is one of our pillars of our eight power analysis when we're looking at a company the fundamentals of a company and paul's gonna explain what pe is and why it is important stay tuned paul go ahead and give us what you got baby so p e is a very common probably the most common value metric out there when everybody talks about a company they'll say what's the pe of the stock now very simply p e ratio is price divided by earnings okay now uncle seth how do we get price there's two ways to get price here right this is market cap or price of the stock share that's a great question you can do both come on so what you do here is most people go to the price the stock price of stock divided by the earnings per share okay yeah yikes paul i'm getting confused already now get come bring me home now okay so what we have here how do we figure out the earnings per share it's very simple first off you can go to our everythingmoney.com website sign up it'll tell you the earnings per share or any other finance site out there or you can sit there and do it by yourself you would sit there and get the net income for the last 12 months it's called trailing 12 months ttm that's taking the last 12 months of net income and dividing by the number of shares outstanding okay so as an example let's say a company has net income of a hundred dollars right so at the end of the year if you look at the bottom of their their most recent four quarters or trillion twelve months numbers it shows profit of a hundred dollars let's say they have 50 shares outstanding so in the marketplace right now there are 50 shares that people own whether it's mutual funds individual investors people in the company etc there are 50 shares the earnings there per share is two dollars correct 100 divided by 50. so that is the earnings portion of this now let's say to get the pe of it let's say the company is currently selling for 40 per share on the market you go to the stock ticker symbol you type it in and it says hey the current price is 40 to get the pe you take the 40 which is the price and divide it by the earnings per share of two dollars and you have a pe of 20. very simple right yep that's how you can do it another way to do it is the market cap of the company is essentially the price of the company because if you remember here the price that if you take the price the company multiplied by all of its shares that equals the market cap it's just the bigger way let's say hypothetically you want to buy all the shares in the market of the company and you want to own the company completely yourself to buy every single share outstanding so you go find number of shares outstanding multiply it by the share price and that's your number that is the market cap so the other way to look at it is market cap and you divide that by total earnings at the bottom of the net income statement for the last 12 months so in our previous example the net earnings were a hundred dollars right correct yes great 100 and let's say the company was worth 200 um two thousand dollars what's that p e two thousand divided by a hundred equals twenty mm-hmm yeah so that's gonna give you a pe of 20 which is the exact same thing those numbers were all quite out so the next question we have is because it's part of our eight pillars right right seth yeah why is this important so it's important it's a very short-term way of looking at a value because it's only one year's worth of information right you're only taking the last one year in any given year there's gonna be ups and downs between any company right so it's just but it is a good guideline of how you sit there and start looking at a company r8 pillars no individual pillar is the be all and end all it's about look at the whole the picture right it's just historically what is do you know the historical average seth for um for pe pe well i mean we love the number 20 around here we talk about 20 but that's not the historical average historical average for the market is about 15. okay even lower yeah we talk about 20 because i do acknowledge that a company that is between 15 to 20 but is growing a little bit should be worth a little bit more money than just the average of 15. we want to be able to factor in growth into the future prospects of earnings right if you had a company today that was when it was making a dollar per year but you thought the future looked like this versus another company that just made a dollar per year which one would you pay more for seth the top one of course of course you would because you're going to make more money as the future goes on so it's no different i don't want to exclude companies that are selling for the lower than the historical average of pe when there could be a million reasons why that's the case in fact a lot of companies will make acquisitions and in future years realize those acquisitions are bad acquisitions and they write off the purchase that's going to hurt your pe because it really drops down your earnings and when you have earnings in the denominator and earnings drop it makes the p e ratio go up inversely right so we don't want to sit there and exclude things just for one-time occurrences that's also why i don't look at pe actually pe is not really one of the more important pillars we have it's just the most common one people talk about so that's why we include it in the analysis i do think it's a good place to start my obviously paul my 11 year old is really into financials looking at stocks and so he can glance at the pe and get some semblance of where this company is being valued at correct and you know if you remember a few months back we did walgreens and i remember excluding walgreens in my initial analysis because it had a 70 pe and then one of our patrons came on and said hey can you do an analysis on walgreens so we did and i realized walgreens had a couple write-offs they had some acquisition charges and i was like wait a second this isn't 70 pe and i bought the stock that day come on for 38 bucks and now it's at 55 because the pe was misleading and that's an example of how sometimes our 500 foot view can exclude certain things yeah okay so we always want to keep pe in mind but we won't we don't want it to be the be all and end all because a low pe may not be a great thing either as an example if a company sells off a division let's say they have let's say a company has three divisions and one division they sell it off they have a one-time huge gain because they sold it off of five billion dollars and the rest of the other two companies sell make two billion dollars a year total seven billion that five billion is not a recurring income you wanna only really include recurring income in that pe you want to exclude one-time charges either the negative or one-time gains to the positive right so pe is an awesome metric to get a really quick how's it done in the last year and also i love it for value investors because people focus so much on pe and the example i just gave you about walgreens is a good way that the astute investor who's gonna do more analysis using our everythingmoney.com uh website will be able to sit there and say wait a second here there's more information here people are ignoring the stock and they should not be yeah so paul's going to pull up a couple companies here to look at one with a low pe and one with an incredibly high pe to give you some examples of what maybe you should be looking at again my as i said my son we use pe the number on our show we usually like is 20. so to pass one of our pillars of eight of our fundamental analysis you know we like it under 20 and a lot of times we'll get some some of these bangers and these crazy hot stocks with really high pe's and paul's going to show us a couple right now so right what's a good company ball that you like so a very popular company am i going to go about good tesla our good friends at tesla right here right so tesla's currently selling for 744 a share right sounds great right it does sound great now let's do the analysis we do before for pe let's do it the long way we're going to do market cap divided by earnings okay now here's the great news seth our wonderful everything money software has it for you on the very first page market cap 707 billion dollars 707 billion and earnings over the last 12 months 690 million okay so let's call it 0.69 billion seth can you do me a favor can you divide that number out real quick 707 divided by 0.69 is 1024 paul 1024 we haven't listed a thousand thirty probably some rounding thing going on a thousand twenty four versus a historical average of fifteen okay now does this in and of itself mean tesla is overpriced no do i think test is overpriced absolutely but for other reasons but initially you're going to sit there and see that tesla is currently selling for 70 times more than the historical average for companies in general okay this is a very high pe but remember years ago i was wrong about amazon amazon was selling for higher votes no x actually was about 7 000 at one point and ended up growing into its value so tesla part of your analysis would be how can earnings jump up to justify this market cap and that's all part of it but this is one of the highest pes out there i mean that's a i should say this apart from a company that has some major drop in earnings this is the most this is the highest pe i know of of a stabilized company that still you know doesn't have any one-time write-offs or anything like that okay now a very popular company amongst our uh patreons is msg networks now again let's do the math here seth market cap call it 900 million and trailing 12 months of profit 180 million very easy math five p e yep that's what you get right here 5 p e this is a very low p now whenever i see a low p i don't go let's do it i go hang on a second let's figure out why this pe is so low i want to make sure it's not some one time we sold the division off and give us a big check etc i want to make sure that it's a reasonable reason why the pe is low and then had to figure out okay but even then why is the pe so low even if it's consistently earnings going up there's going to be some other reason because the vast majority of stocks that are selling low have a reason they're selling low but the pe is a great great way to look at it from a snapshot point of view and say how did the last year go that's our take home on pe it is one of our pillars of our eight pillar analysis uh if you uh if you're one of our fans and seen this before uh you know we have our numbers that we love and uh and we hope you are learning them and if you're new to this um we have we're gonna do more videos on our eight pillar analysis all the eight pillars and what they mean and how they all work together to to valuing a company and and hopefully uh if you're buying or selling shares of this company or getting into it you know what you're doing uh yeah paul that's it pe thanks for joining us as always make sure you tickle the like check out the patreon below if you love what you're seeing and um yeah thanks guys appreciate it thanks so much for watching the video we hope you were intrigued if this style of investing speaks to you click the 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Channel: Everything Money

Views: 25,951

Keywords: pe ratio, everything money, investing, investing101, investing in your 20s, financial education, fundamental stock analysis, investing 101, stock fundamental analysis, stocks, stock market, stock, p/e ratio, p/e ratio explained, what is p/e ratio, price to earnings, value investing, what is the pe ratio, price to earnings ratio, what is pe ratio, pe ratio explained, fundamental analysis, what is pe ratio in stocks, fundamentals, stock price, stock analysis

Id: J8wCSHgqiI0

Length: 13min 31sec (811 seconds)

Published: Mon May 10 2021