What Does a Stock Trading at 20X Earnings Mean?

Stock valuation

A common metric used by stock investors is the price-to-earnings ratio, or P/E, expressed by saying the stock is some number times (X) earnings.

Advertisement

Identification

Video of the Day

A stock trading at 20X earnings has a share price 20 times the current or previous year's net earnings per share.

Video of the Day

Function

Publicly traded companies report profits as "earnings per share." The P/E ratio gives investors an indication of how the stock price relates to companies' profitability.

Advertisement

Calculation

Current stock price divided by the most recent four calendar quarters of earnings determines the P/E ratio. If stock is $60 and the company earned $3 per share over the past year, 60 divided by 3 shows the stock is trading at 20X earnings.

Advertisement

Considerations

P/E ratios can compare stock valuations. If Company A is $50 per share and trading at 15X earnings and Company B is $30 per share but trading at 25X earnings, Company B has a higher value in relation to earnings.

Advertisement

Advertisement

Significance

P/E ratios can indicate a stock's value. If company earnings grow at 30 percent per year but the P/E ratio is 20X earnings, it may be undervalued. If the P/E ratio and growth are nearly even, the stock is fairly valued, according to SmartMoney.com.

Advertisement

Potential

Calculating the P/E ratio using projected earnings for next year is a "forward P/E." StreetAuthority.com warns of errors with such projections, and suggests using forward P/E and other metrics to evaluate stock.

Advertisement

Advertisement