We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Nobody downloaded yet

PE Ratios & Profit Performance - Essay Example

Comments (0) Cite this document
Summary to essay on topic "PE Ratios & Profit Performance"
This report provides a discussion on the possible factors that can influence the price-earning ratio of a company's shares. As the ratio itself depends upon various other factors, therefore, all these factors can either lead the ratio to reach the highest or the lowest level…
Download full paper
Polish This Essay
PE Ratios & Profit Performance
Read TextPreview

Extract of essay "PE Ratios & Profit Performance"

Download file "PE Ratios & Profit Performance" to see previous pages... As said by Flamholtz (1986, p655), "The price-earnings (P-E) ratio measures the relationship of the market price of a firm's common stock to its earnings per share", the P/E ratio is a measure of analysing a company's market position and investors trust that is reflected in the market price of its shares.
Let us write or edit the essay on your topic "PE Ratios & Profit Performance" with a personal 20% discount.. Try it now
The higher the price-earnings ratio, the higher the growth potential the company has in the view of its investors. It reveals the market worth of a company's shares and explains how expensive the shares are in relation to the earnings obtained on the shares. For instance, two different companies have the same level of net profit but one company has a lower Price-earnings ratio, it would reflect that its shares are cheaper than the other company.
From the above chart also, the P/E ratios of five companies can easily be spotted. All these companies are from the same industry and are among the most popular companies in the retail sector. As reflected by above price-earning ratios, these companies have a varying range of ratios as at February 8, 2006. The price-earning ratio is calculated by dividing a company's market price with the earnings per share and therefore, the price-earning ratio of a company depends upon several factors that are responsible to keep it at a lower or higher level. The determinants of a company's P/E ratio force the company's market price to fluctuate, which is followed by a fluctuation in the ratio. Some of the major determinants causing variation in different companies' price-earnings ratios are discussed below:

Growth Potential

Brealey and Meyers (1984) suggest that a company's high price-earning ratio reflects that the investors have more confidence in the company's future growth potential. It shows that the expectation of a company's future growth also has a great impact on its price-earning ratio. It is true that investors do have a keen eye on various companies' financial position and performance so that they can also benefit with a company who is climbing the high ladders of growth and profitability. If the company is growing, it will have more profit to be forwarded to the shareholders. Therefore when the investors believe in a company's future performance, they will be willing to invest more in the company's shares leading to a significant rise in the stock value followed by an increase in the P/E ratio.

The chart displaying the price-earning ratios of the companies from same industry reveals that the company with a high P/E ratio i.e., Morrison plc with a P/E ratio of 47.2, has more future growth prospects in the eyes of its investors and shareholders than the other companies in the industry i.e., Boots, Tesco, Marks and Spencer and JB Sports plc. This is because the investors mostly look for benchmarking a company's performance and potential with the other companies in industry standing at the same level and once they find a company with better prospects, they invest more of their funds in the company's shares. Hence, it can be said that the element of growth potential is one of the major causes underlying the differences between the above companies' price-earning ratios.

Net Profit

Smith and Skousen (1987) suggest that an increase or decrease in a company's price-earning ratio is the resultant of its profitability. It indicates that more a company is profitable; ...Download file "PE Ratios & Profit Performance" to see next pagesRead More
Cite this document "PE Ratios & Profit Performance"
  • APA
  • MLA
  • CHICAGO
(“PE Ratios & Profit Performance Essay Example | Topics and Well Written Essays - 1750 words”, n.d.)
Retrieved from https://studentshare.org/miscellaneous/1501396-pe-ratios-profit-performance
(PE Ratios & Profit Performance Essay Example | Topics and Well Written Essays - 1750 Words)
https://studentshare.org/miscellaneous/1501396-pe-ratios-profit-performance.
“PE Ratios & Profit Performance Essay Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/miscellaneous/1501396-pe-ratios-profit-performance.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC "PE Ratios & Profit Performance"
Ratios
In order to compare the ratio analysis results of Target a control company was selected for comparison purposes. The company that will be used to compare the ratio analysis is Costco. Costco is the US 6th largest retailer and the 7th largest retailer in the world.
3 Pages(750 words)Essay
Ratios/Profit Margin
Among these statements include balance sheet, income statements and cash flow. Practically, financial ratios are calculated to help in analyzing trends, as well, as to conduct a comparison of the company’s financial performance with other companies in the same industry (Lewellen, 2004).
3 Pages(750 words)Assignment
Business finance and legal service coursework(Write a report on the financial performance of a company in a particular sector)
The sector encountered a sharp reduction in the purchasing activities during 2012. Preference for reduced stock holding and a lower new order has led to a sharp cut in purchase activities. The deceleration in the manufacturing sector owes its root to the high rate of job shedding marked from July 2011 which was highest during 2012.
4 Pages(1000 words)Essay
Case study on Bank Management
1. Loan ratio: It is the percentage of the total assets that is given out as loans. Loans are the highest earning assets, and First National Bank has disbursed only about 24% of its total asset base as loans as compared to about 55% for its peers. So, there is a lot of room for improvement for the First National Bank.
2 Pages(500 words)Essay
Financial Statement Ratio Analysis
We would try to keep the language as simple as possible so that we don't complicate things right from the start. First thing you realize is that you would need to bake cookies so as to be able to sell them. For which you would require flour, butter, sugar, etc.
14 Pages(3500 words)Essay
Ratio Analysis Essay
Financial statements are the major means through which firms present their financial situation to stockholders, creditors, and the general public. The majority of firms include extensive financial statements in their annual reports, which receive wide distribution.
10 Pages(2500 words)Essay
Financial performance of Intercontinental Hotels Group Plc 2009-2010
In terms of number of rooms, the company is the largest in the world. Gross margin can be defined as the ratio of gross profit to total sales. The gross margin for IHG has
8 Pages(2000 words)Essay
Ratios
Such cases are however fundamental to an entity’s sustainability and are therefore important to stakeholders such as investors, debtors, and suppliers whose interest lies
1 Pages(250 words)Essay
Discuss the usefulness and limitations of financial ratios in evaluating the performance and management of companies
Investors use these ratios to make comparisons between companies in the same industry. Most of these ratios are not generally meaningful when evaluated alone but they tend to bring
6 Pages(1500 words)Essay
Pe
There are a number of historical women who up to date stand out very conspicuously, most notable in the history of Greece of which are Sappho
4 Pages(1000 words)Essay
Let us find you another Essay on topic PE Ratios & Profit Performance for FREE!
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us