P/E is a comparison of the price of a stock compared to it’s earnings per share(EPS). It creates a single number that tells you how much you pay per $1 earned at the company. A P/E of 15 means that you will pay $15 for every dollar earned by the company. Let’s break down P/E components even further and look at what could influence this number to be higher or lower.
First we can look at the Price of the stock. If the stock costs $21.94 a share we pay that money and get 1 share of stock. If the price of 1 share goes up we make money, if the share price goes down we lose money.
E – Earnings Per Share: This is where there are other factors that can influence you’re overall multiple in a big way and maybe not so obvious. Being the denominator in the equation means that the larger it is compared to price the smaller the multiple. How does one arrive at earnings per share?
Now it’s easier to see that a large amount of shares issued by the company can drive down the EPS, conversely a low number could drive the number up. Also if the company pays a preferred dividend(a dividend paid out before the common shareholder dividend) it can be driven lower.
Another factor to consider is how price can be used to determine the number of common shares issued.
