P/E Price Earnings Ratio The Price / Earnings Ratio is pretty much what the name says. The price of one share of stock is a multiple of the earnings per share of stock. In reference to a few Dow Blue Chip stocks, their P/E Ratios are as follows: Price EPS P / E Ratio Procter & Gamble 133 4.96 27 / 1 3 M 158 8.81 18 / 1 Bank of America 26 2.08 12 / 1 Walmart 130 5.26 24 / 1 Coca-Cola 48 2.12 22/1 Non-Dow 30 Fifth-Third Bank 20 1.95 10 / 1 Huntington Bank 9 .79 12 / 1 The ratios are generally somewhere around 20 / 1.

This means if you invest $20 for one share of stock, you should expect $1 in earnings. This is a 5% return. But remember, these are Blue Chips. For other Wall Street traded companies, you should set a benchmark of a 15 / 1 ratio. Notice the last two local bank stocks are closer to 10 / 1.

For those two local stocks, this means if you invest $10 you should expect $1 in earnings. This is a 10% return. Smaller companies like the one in our simulation are also often somewhere around 10 / 1 Exercise

A. What is the current Book Value of your business? Book is the same as Total Shareholder Equity or Total Assets minus Total Liabilities.

B. What is the current net profit after tax?

C. How many shares of stock are outstanding?

D. What is the Book Value per Share? What is the Earnings Per Share ( EPS ) ?

E. What is your current stock price? What is your price / earnings ratio?

F. The market determines your P/E ratio based on performance, outlook, etc. What if the market determined your stock value should be 10 / 1; or 15 / 1; or 20 / 1? What would be the market price of one share of stock in your company using those situations? 10 / 1 15 / 1 20 / 1

G. Which value is the most likely? Why?