Classes-To-Go What is a P/E Ratio and Why Should I Care? Allen Holdsworth Illowa Buy States Chapter BIVA Board Director

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BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios Presented by: Allen Holdsworth Illowa Buy States Chapter- Director BIVA Board-Director Teach 16 week Personal Investing class at community college

BETTERINVESTING NATIONAL CONVENTION What is a P/E Ratio? It is NOT gym class No need to get all sweaty You can figure out P/E ratios even if you can’t walk and chew gum at the same time!

BETTERINVESTING NATIONAL CONVENTION What is the P/E Ratio? The P/E ratio is the price per share of stock divided by the earnings per share of stock The question is - which earnings are used?

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios P/E Ratio means: Price per share divided by the earnings per share from the last 4 quarters This is the trailing P/E Price changes every day Earnings per share only changes each quarter

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios Value Line uses current P/E--Use the last 2 quarters plus the next 2 quarters in the future Future P/E uses the projected earnings over some future time period

BETTERINVESTING NATIONAL CONVENTION P/E Ratios The P/E ratio is the amount of money someone is willing to pay to get $1 of earnings It could be considered a popularity contest In general - the faster a company is growing, the higher the P/E it will have

BETTERINVESTING NATIONAL CONVENTION P/E Ratios What makes the P/E change? The future growth prospects are the driving force in price and P/E

BETTERINVESTING NATIONAL CONVENTION P/E Ratios What is a good P/E or a bad P/E Is a P/E of 20 good or bad? It depends!!!! –Look at past history of P/E ratios –Look at other companies in same industry –Look at average P/E for S&P 500 –Look at the prospects for the company

BETTERINVESTING NATIONAL CONVENTION P/E Ratios In general, the faster a company grows - the higher the P/E ratio As the growth of a company slows over time - the P/E ratios will usually come down

BETTERINVESTING NATIONAL CONVENTION P/E Ratios Different types of industries tend to have different P/Es - even if the growth rates are similar Part 3 of the Stock Selection Guide helps us determine the normal range of high and low P/E

BETTERINVESTING NATIONAL CONVENTION P/E Ratios- Pulte Homes

BETTERINVESTING NATIONAL CONVENTION P/E Trend last ten years

BETTERINVESTING NATIONAL CONVENTION P/E Ratios-BUD

BETTERINVESTING NATIONAL CONVENTION P/E Ratios- BBBY

BETTERINVESTING NATIONAL CONVENTION Section 3- Apple Computer

BETTERINVESTING NATIONAL CONVENTION XM-How do you make an estimate?

BETTERINVESTING NATIONAL CONVENTION P/E Ratios in Section 3 Eliminate outliers - can see the last 10 years of P/Es on Toolkit- click on avg. high or avg. low P/E box in Section 3 P/E expanding - use average P/E shrinking - use most recent or even lower Max. high P/E of 30 (1.5 times growth rate or sometimes 2 times growth rate)

BETTERINVESTING NATIONAL CONVENTION P/E Ratios Don’t buy a stock just because the P/E ratio is low Do more research - try to discover why it is low There may be bad news and it deserves to be low The future growth prospects are the real driving force

BETTERINVESTING NATIONAL CONVENTION P/E Ratios There are 7 basic ways a company can increase earnings –Reduce costs –Raise prices –Open more stores/expand –Sell more in existing markets –Fix or sell losing operations –Buy back shares –Lower taxes paid

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios References: from BetterInvesting: –Stock Selection Handbook –Using Portfolio Management Wisdom

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