THE PRICE/EARNINGS RATIO
We’ve gone on about this already, but here’s a useful refinement: The p/e ratio of any company that’s fairly priced will equal its growth rate.
I’m talking about growth rate of earnings here. How do you find that out? Ask your broker what’s the growth rate, as compared to the p/e ratio.
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Similar ideas to Some Famous Numbers
Let's say that a company's stock trades for $100 and that the company has earnings per share (EPS) of $6.50 over the last 12 months.
We can calculate a trailing ("last 12 months") P/E ratio for that stock by simply dividing the stock price ("P") by the EPS ("E"), so 100/6.50 equals about 1...
A slightly more complicated formula enables us to compare growth rates to earnings, while also taking the dividends into account.
Find the long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent), and divide by the p/e ratio (Company X’s is ...
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