Problem with calculating price to earning ratio?

[RandomInvestor]

Hey there guys I have a problem getting the Price to earning ratio, if you google a company for example Facebook it shows the p/e ratio is 62. but when I did the manual calculation which is stock current price / eps I get the wrong number.

So I did 128.99 (stocks current price) / 1.24(EPS) Which I found here : http://www.nasdaq.com/symbol/fb/revenue-eps

But I get the output as 104.024, which one is correct?

 

[galumay]

Depends what period of earnings they used, also what share price.

As long as you use the same data for different companies you will be comparing apples with apples. P/E has limited use in analysing company financials IMO.

 

[craft]

Hey there guys I have a problem getting the Price to earning ratio, if you google a company for example Facebook it shows the p/e ratio is 62. but when I did the manual calculation which is stock current price / eps I get the wrong number.

So I did 128.99 (stocks current price) / 1.24(EPS) Which I found here : http://www.nasdaq.com/symbol/fb/revenue-eps

But I get the output as 104.024, which one is correct?

1.24 is for only the first 2 quarters of 2016. Earnings for the past 4 quarters/12 months also referred to as trailing twelve months or ttm is 2.09, which would produce the 62 number given.

 

[RandomInvestor]

1.24 is for only the first 2 quarters of 2016. Earnings for the past 4 quarters/12 months also referred to as trailing twelve months or ttm is 2.09, which would produce the 62 number given.

So how do I work this out, I'm confused. How did we get the value 62?

 

[craft]

So how do I work this out, I'm confused. How did we get the value 62?

Price $128.99 divided by earnings $2.09

 

[RandomInvestor]

Price $128.99 divided by earnings $2.09

Wah where did we get 2.09? They never mentioned that as part of the formula

 

[galumay]

Wah where did we get 2.09? They never mentioned that as part of the formula

Try reading the replies to your post, craft has already clearly explained that the full, previous year's earnings were reported as $2.09.

 

[craft]

Wah where did we get 2.09? They never mentioned that as part of the formula

From your link, the last four quarters.. 71+.52+.54+.32=2.09

 

[RandomInvestor]

From your link, the last four quarters.. 71+.52+.54+.32=2.09

Oh I see thanks mate. Also I see you used the numbers from last years result is that because this year's is not yet avaliable?

 

[craft]

Oh I see thanks mate. Also I see you used the numbers from last years result is that because this year's is not yet avaliable?

The USA way seems to be to use trailing twelve month (ttm) for the earning figures. There companies generally report quarterly and they use the most recent 4 quarters available at any given point.

In Aus it tends to be more the latest full year reported results are generally used as the earnings for 'Current' P/E or coming years analyst estimates for a 'Forward' P/E


To add to your confusion its not just the time frame of earnings that can vary, there is also different ways that earnings can be stated, statutory, underlying etc.

Are you studying or intending to invest/trade? if its the later beware, Simplistic interpretations of P/E can easily lead you astray.

 

[luutzu]

Hey there guys I have a problem getting the Price to earning ratio, if you google a company for example Facebook it shows the p/e ratio is 62. but when I did the manual calculation which is stock current price / eps I get the wrong number.

So I did 128.99 (stocks current price) / 1.24(EPS) Which I found here : http://www.nasdaq.com/symbol/fb/revenue-eps

But I get the output as 104.024, which one is correct?

Facebook is 104 times earnings?

You know what that implies right?

But to the point, I find it more informative (and accurate) to work out the entire total earnings, and find out the latest current shares outstanding. Then work out the PE ratio that way.

It can be risky to simply use the reported EPS and the reported shares outstanding as they tend to be the figures last reported in an official annual report.

For young and broke companies, they issue their shares like it's just numbers. So a year or a quarter can mean a big difference in that share outstanding figure.


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for what it's worth, any PE above 35 are pure speculative buying. They might work out but the upside in those companies usually have nothing but hope and dreams.

 

[skc]

for what it's worth, any PE above 35 are pure speculative buying. They might work out but the upside in those companies usually have nothing but hope and dreams.

Well it depends on the PE calculation method. May be the high PE was a result of a large (and truely) one-off item that depressed current year earnings... the underlying company may or may not be pure speculation. But any PE value screamingly large should be thoroughly investigated.

To the OP -
Personally I think the right way to use PE is to construct it from the ground up. i.e. use your own estimates/interpretation of the earnings and use the right number of shares issued as luutzu mentioned. Then it becomes a number you can take ownership of.

 

[RandomInvestor]

The USA way seems to be to use trailing twelve month (ttm) for the earning figures. There companies generally report quarterly and they use the most recent 4 quarters available at any given point.

In Aus it tends to be more the latest full year reported results are generally used as the earnings for 'Current' P/E or coming years analyst estimates for a 'Forward' P/E


To add to your confusion its not just the time frame of earnings that can vary, there is also different ways that earnings can be stated, statutory, underlying etc.

Are you studying or intending to invest/trade? if its the later beware, Simplistic interpretations of P/E can easily lead you astray.

Hi I study investing in my spare time have for about a year will start investing end of this year i nlower risk securities while I study value investing more, I still got alot of ratios to remember and try find the intrinsic value formula which is a pain. Also the P/E ratio I won't be overusing like alot of investors do I just want to make sure I am 100% confident in been able to obtain the data.

 

[RandomInvestor]

Facebook is 104 times earnings?

You know what that implies right?

But to the point, I find it more informative (and accurate) to work out the entire total earnings, and find out the latest current shares outstanding. Then work out the PE ratio that way.

It can be risky to simply use the reported EPS and the reported shares outstanding as they tend to be the figures last reported in an official annual report.

For young and broke companies, they issue their shares like it's just numbers. So a year or a quarter can mean a big difference in that share outstanding figure.


-----

for what it's worth, any PE above 35 are pure speculative buying. They might work out but the upside in those companies usually have nothing but hope and dreams.

What do you mean by 104 times earnings?

 

[luutzu]

What do you mean by 104 times earnings?

In your calculation above for Facebook, the price divide by the earnings per share = 104. i.e., price is 104 times earnings.

What that PE ratio implies is that, holding everything constant, facebook's current earnings will take 104 years to break even for its current buyer.

But since everything can't be held constant... so FB's earnings could really accelerate and multiples while its price and share won't be diluted... then the investor would do very well.

Hard to predict whether FB will be earning like Apple did, or will go the way of MySpace and other web ventures. So high multiple PE stocks need a lot of luck and a lot of understanding of the business to maybe then help investor sleep at night.

----

Others will disagree, but what I learn is valuation are only of two types: asset perspective, or P/E multiples.

Once you understand the business properly, it should only take you 5 minute to come to a value using either or both of the above two methods.

Which method you should use, how far you should take it... it will depends on your understanding of the business, the state and position the business is at, and your comfort level.


Graham has a short hand formula to approximate market's implication in their price and the company's earnings. That all the detailed forecasts and earning estimates boils down to that formula.

I've applied to a few major Aussie corporations, and a couple of Buffett's buys, and it makes a lot of sense... check it out in Graham's two famous books.

 

[luutzu]

Well it depends on the PE calculation method. May be the high PE was a result of a large (and truely) one-off item that depressed current year earnings... the underlying company may or may not be pure speculation. But any PE value screamingly large should be thoroughly investigated.

To the OP -
Personally I think the right way to use PE is to construct it from the ground up. i.e. use your own estimates/interpretation of the earnings and use the right number of shares issued as luutzu mentioned. Then it becomes a number you can take ownership of.

True. I follow Graham's advice in that regard and use average of past 3 and 5 years; try to project near future based on latest developments. Together they tend to give a good sense of the business in general.

On some company I don't even look at its earnings records at all because they've earned nothing.

 

[RandomInvestor]

True. I follow Graham's advice in that regard and use average of past 3 and 5 years; try to project near future based on latest developments. Together they tend to give a good sense of the business in general.

On some company I don't even look at its earnings records at all because they've earned nothing.

Wait a second calculating intrinsic value is related to the earnings a company makes each year and you need to figure out how much it will be earning? So if a company earns 20m every year, you can make the assumption that they will keep doing for a few years and you can come up with a value on the share price it self?

 

[galumay]

Wait a second calculating intrinsic value is related to the earnings a company makes each year and you need to figure out how much it will be earning? So if a company earns 20m every year, you can make the assumption that they will keep doing for a few years and you can come up with a value on the share price it self?

Well, its better to calculate IV based on Free Cash Flow rather than the more easily distorted earnings. There is no simple formula to derive IV, and no certainty that Mr Market will ever agree with your calculated IV - remember the saying that the market can remain irrational a lot longer than you can remain solvent!

The theory in general, is that a businesses IV is the sum of all future cash flows, discounted to today's dollar value. Different people use different models and formulas and the good ones never rely on only one model or formula. Its not an exact science, I use my DCF model to give me a range of IV and I will use up to 4 different formulas. I also look at a lot of other metrics and subjective measures like quality of management, competitive advantage, etc.

 

[RandomInvestor]

Well, its better to calculate IV based on Free Cash Flow rather than the more easily distorted earnings. There is no simple formula to derive IV, and no certainty that Mr Market will ever agree with your calculated IV - remember the saying that the market can remain irrational a lot longer than you can remain solvent!

The theory in general, is that a businesses IV is the sum of all future cash flows, discounted to today's dollar value. Different people use different models and formulas and the good ones never rely on only one model or formula. Its not an exact science, I use my DCF model to give me a range of IV and I will use up to 4 different formulas. I also look at a lot of other metrics and subjective measures like quality of management, competitive advantage, etc.

Ah ok. so the Cashflow statement is important in this state? I look at historical data and make determination off that?

 

[galumay]

Ah ok. so the Cashflow statement is important in this state? I look at historical data and make determination off that?

Well, its part of the story, you need to look at things like change in working capital, changes in borrowings and other bits and pieces, depending on the model you choose.

Perhaps its time to tell us whether you are planning to start investing in the share market, or doing some sort of study? Then we can recommend some relevant reading material to suit your needs.