Tuesday, November 15, 2011

Multiple of Earnings aka "Price to Earnings (PE) ratio"


P.E Ratio = Price to Earnings
  • Divide the price of a business by annual revenue. The number you get is a percentage.



Example:

Business A:
Sale price: $150,000
Annual Revenue: $50,000
P.E ratio = 3
Limited growth opportunities, company can't increase profits without substantially expanding in ways that increase it's value.

Business B: 
Sale Price: $150,000
Annual Revenue: $10,000
P.E Ratio =  15
Much better room to increase revenue to increase profits.
http://www.investopedia.com/university/peratio/#axzz1dhAUlkAE

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