Price Earnings Ratio

Topics: P/E ratio, Dividend yield, PEG ratio Pages: 3 (957 words) Published: December 28, 2012
Price/Earnings Ratio Model (P/E)
The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular metric of stock analysis. A valuation ratio of a company's current share price compared to its per-share earnings. For example, if a company is currently trading at $60 a share and earnings over the last 12 months were $2 per share, the P/E ratio for the stock would be 30 ($60/$2). The earnings multiplier can be computed as follows: P/E Ratio = Current Market Price of Shares / Expected 12-months Earnings per share However, the infinite period dividend discount model (DDM) can be used to indicate the variables that should determine the value of the P/E ratio as follows: Po=Do1+gre-g=D1re-g

If we divide both sides of the equation (earning per share), the result is: PoEPSo=DoEPSo1+gke-g
Thus earnings multiplier can be ultimately simplified as:
This model implies that P/E ratio is determined by:
* The expected dividend payout ratio (dividends divided by earnings) * The estimated required rate of return on the stock (k ) * The expected growth rate of dividends for the stock (g)

Given the above formulas and information, we can now calculate the P/E ratio for Vingroup: Table 1: P/E Ratio forecast
 | Current (9 mounths 2012)| 2013|
Growth rate| | 0.08|
Net Earning after tax| VND 1,352,077,007,504.00| |
Weight Average of Ordinary Shares| 645,358,358.00| |
EPS0| VND 2,095.08| VND 2,262.69|
P0 (14/12/2012)| VND 76,000.00| |
P/E| 36.27547465| |
 | | |
PE Price | VND 82,080.00| |

Our computed P/E ratio of 36.275 suggests that investors are willing to give up 36.275VND for every 1VND of earnings that the company generates. In evaluating Vingroup’s P/E ratio to determine whether it is over / underpriced, we will compare the P / E ratio of Vingroup with the others in the same industry, if the P / E ratio of a company is higher than average,...
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