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Ｏｎｅ ｏｆ ｔｈｅ ｂｅｓｔ ｔｈｉｎｇｓ ａｂｏｕｔ ｈａｖｉｎｇ ａｎ ａｃｃｏｕｎｔｉｎｇ ｄｅｇｒｅｅ ｗａｓ ｂｅｉｎｇ ｔａｕｇｈｔ ｈｏｗ ｔｏ ｆｉｇｕｒｅ ｏｕｔ ｆｉｎａｎｃｉａｌ ｒａｔｉｏｓ ｆｒｏｍ ａｎ ｉｎｃｏｍｅ ｓｔａｔｅｍｅｎｔ ｏｒ ｂａｌａｎｃｅ ｓｈｅｅｔ. Ｈｏｗｅｖｅｒ, ｙｏｕ ｄｏ ｎｏｔ ｎｅｅｄ ａｎ ａｃｃｏｕｎｔｉｎｇ ｄｅｇｒｅｅ ｔｏ ｌｅａｒｎ ｈｏｗ ｔｏ ｕｓｅ ｒａｔｉｏｓ ｔｏ ｄｅｃｉｄｅ ｗｈｅｔｈｅｒ ｙｏｕ ｗａｎｔ ｔｏ ｉｎｖｅｓｔ ｉｎ ａ ｃｏｍｐａｎｙ ｏｒ ｎｏｔ. Ｔｈｉｓ ａｒｔｉｃｌｅ ｗｉｌｌ ｔｅａｃｈ ｙｏｕ ｈｏｗ ｔｏ ｆｉｇｕｒｅ ｏｕｔ ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ, ａｎｄ ｗｈｙ ｋｎｏｗｉｎｇ ｔｈｉｓ ｒａｔｉｏ ｃａｎ ｈｅｌｐ ｙｏｕ ｉｎ ｍａｋｉｎｇ ａｎ ｉｎｖｅｓｔｍｅｎｔ ｄｅｃｉｓｉｏｎ. Ｗｈｅｎ ｓｔｕｄｙｉｎｇ ａ ｆｉｎａｎｃｉａｌ ｓｔａｔｅｍｅｎｔ ｄｅｃｉｄｉｎｇ ｗｈｅｔｈｅｒ ｙｏｕ ｓｈｏｕｌｄ ｉｎｖｅｓｔ ｏｒ ｎｏｔ; ｏｎｅ ｕｓｅｆｕｌ ｒａｔｉｏ ｔｏ ｍａｋｅ ｔｈｉｓ ｄｅｃｉｓｉｏｎ ｉｓ ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ. Ｏｎ ｔｈｅ ｂａｌａｎｃｅ ｓｈｅｅｔ, ｗｈｅｎ ａ ｃｏｍｐａｎｙ ｒｅｐｏｒｔｓ ｔｈｅ ｖａｌｕｅ ｏｆ ｔｈｅｉｒ ｓｔｏｃｋ ｓｈａｒｅｓ, ｔｈｅｙ ｇｏ ｂｙ ｂｏｏｋ ｖａｌｕｅ. Ｈｏｗｅｖｅｒ, ｔｈｅ ｂａｌａｎｃｅ ｓｈｅｅｔ ｉｓ ｏｎｌｙ ａ ｓｎａｐｓｈｏｔ ｏｆ ｔｈｅ ｂｕｓｉｎｅｓｓ, ａｔ ｔｈａｔ ｐａｒｔｉｃｕｌａｒ ｍｏｍｅｎｔ ｉｎ ｔｉｍｅ. Ｉｔ'ｓ ｉｍｐｏｒｔａｎｔ ｔｏ ｕｎｄｅｒｓｔａｎｄ ｔｈａｔ ｏｎｅ ｆａｃｔｏｒ ｗｈｉｃｈ ｄｒｉｖｅｓ ｍａｒｋｅｔ ｖａｌｕｅ ｏｆ ａ ｃｏｍｐａｎｙ'ｓ ｓｔｏｃｋ ａｒｅ ｉｔｓ ｅａｒｎｉｎｇｓ. Ｂｙ ｕｓｉｎｇ ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ, ｙｏｕ'ｌｌ ｇｅｔ ａｎ ｉｄｅａ ｏｆ ｅｘａｃｔｌｙ ｗｈａｔ ｔｈｅ ｃｕｒｒｅｎｔ ｐｒｉｃｅ ｆｏｒ ｓｔｏｃｋ ｓｈａｒｅｓ ａｒｅ, ｐｅｒ ｄｏｌｌａｒ ｏｆ ｅａｒｎｉｎｇｓ. Ｉｎ ｏｔｈｅｒ ｗｏｒｄｓ, ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ ｗｉｌｌ ｒｅｖｅａｌ ｔｏ ｙｏｕ ｗｈｅｔｈｅｒ ｔｈｅ ｐｒｉｃｅ ｏｆ ｔｈｅ ｓｔｏｃｋ ｉｓ ｏｖｅｒ ｉｎｆｌａｔｅｄ, ｕｎｄｅｒｖａｌｕｅｄ, ｏｒ ｊｕｓｔ ｒｉｇｈｔ; ｂａｓｅｄ ｏｎ ｔｈｅ ｐｒｏｆｉｔ ｔｈｅ ｂｕｓｉｎｅｓｓ ｉｓ ｅａｒｎｉｎｇ. Ｉｆ ｙｏｕ ｆｉｎｄ ａ ｃｏｍｐａｎｙ ｗｈｉｃｈ ｈａｓ ａ ｈｉｇｈ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ, ｔｈｉｓ ｉｓ ｏｎｌｙ ａｃｃｅｐｔａｂｌｅ ｉｆ ｔｈｅ ｃｏｍｐａｎｙ ｉｓ ｌｏｏｋｉｎｇ ｔｏ ｍａｋｅ ｓｏｍｅ ｂｉｇ, ｐｒｏｆｉｔａｂｌｅ, ｍｏｖｅｓ ｉｎ ｔｈｅ ｎｅａｒ ｆｕｔｕｒｅ. Ｔｏ ｃａｌｃｕｌａｔｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ, ｙｏｕ ｄｉｖｉｄｅ ｔｈｅ ｃｕｒｒｅｎｔ ｍａｒｋｅｔ ｐｒｉｃｅ ｏｆ ｔｈｅ ｓｔｏｃｋ ｂｙ ｔｈｅ ｍｏｓｔ ｒｅｃｅｎｔ ｃｏｎｓｅｃｕｔｉｖｅ 12 ｍｏｎｔｈｓ ｄｉｌｕｔｅｄ ｅａｒｎｉｎｇｓ ｐｅｒ ｓｈａｒｅ. Ｔｈｅ ｓｔｏｃｋ ｍａｒｋｅｔ ｃａｎ ｂｅ ａ ｖｅｒｙ ｖｏｌａｔｉｌｅ ｐｌａｃｅ. Ｔｈｅｒｅｆｏｒｅ, ｉｔ ｉｓ ｌｉｋｅｌｙ ｔｈａｔ ｓｔｏｃｋ ｐｒｉｃｅｓ ｗｉｌｌ ｇｏ ｕｐ ａｎｄ ｄｏｗｎ ｄａｉｌｙ ａｎｄ ｃａｎ ｃｈａｎｇｅ ｄｒａｓｔｉｃａｌｌｙ ｉｎ ｔｈｅ ｍａｔｔｅｒ ｏｆ ａ ｆｅｗ ｍｉｎｕｔｅｓ. Ｙｏｕ ｃａｎ ｄｅｔｅｒｍｉｎｅ ｗｈｅｔｈｅｒ ｔｈｅ ｃｕｒｒｅｎｔ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ ｉｓ ａｂｏｖｅ ｏｒ ｂｅｌｏｗ ｔｈｅ ｃｕｒｒｅｎｔ ｍａｒｋｅｔ ａｖｅｒａｇｅ. Ｙｏｕ ｃａｎ ａｃｃｏｍｐｌｉｓｈ ｔｈｉｓ ｂｙ ｃｏｍｐａｒｉｎｇ ｔｈｅ ｃｏｍｐａｎｙ'ｓ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｔｏ ｔｈｅ ａｖｅｒａｇｅ ｓｔｏｃｋ ｍａｒｋｅｔ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ. Ｔｈｅ Ｐ/Ｅ ｉｓ ｄｅｐｅｎｄｅｎｔ ｕｐｏｎ ｉｎｄｕｓｔｒｙ ａｎｄ ｃａｎ ｃｈａｎｇｅ ｆｒｏｍ ｙｅａｒ ｔｏ ｙｅａｒ. Ｉｆ ａ ｃｏｍｐａｎｙ ｉｓ ｍａｔｕｒｅ, ａｎｄ ｉｔ ｉｓ ｉｎｖｏｌｖｅｄ ｉｎ ａ ｎｏ ｇｒｏｗｔｈ ｉｎｄｕｓｔｒｙ, ｏｎｅ ｄｏｌｌａｒ ｍａｙ ｆｅｔｃｈ ｏｎｌｙ ａ $10 ｏｒ ｌｅｓｓ ｍａｒｋｅｔ ｖａｌｕｅ. Ｃｏｎｖｅｒｓｅｌｙ, ｉｆ ａ ｃｏｍｐａｎｙ ｉｓ ｉｎｖｏｌｖｅｄ ｗｉｔｈ ｔｈｅ ｈｉｇｈ ｇｒｏｗｔｈ ｉｎｄｕｓｔｒｙ, ｉｔ ｗｏｕｌｄ ｎｏｔ ｂｅ ｕｎｃｏｍｍｏｎ ｆｏｒ ｔｈｅ ｃｏｍｐａｎｙ ｔｏ ｈａｖｅ $30 ｏｒ ｍｏｒｅ ｐｅｒ ｄｏｌｌａｒ ｏｆ ｅａｒｎｉｎｇｓ, ｏｆ ｎｅｔ ｉｎｃｏｍｅ. Ｔｏ ｓｕｍｍａｒｉｚｅ: Ｐ/Ｅ ｉｓ ｃａｌｃｕｌａｔｅｄ ｂｙ ｄｉｖｉｄｉｎｇ ｔｈｅ ｃｕｒｒｅｎｔ ｍａｒｋｅｔ ｐｒｉｃｅ ｏｆ ｔｈｅ ｃａｐｉｔａｌ ｓｔｏｃｋ ａｒｅ ｐｒｏｖｉｄｅｄ ｂｙ ｉｔｓ ｍｏｓｔ ｒｅｃｅｎｔ 12-ｍｏｎｔｈ ｄｉｌｕｔｅｄ ｅａｒｎｉｎｇｓ ｐｅｒ ｓｈａｒｅ, ｏｒ ｂａｓｉｃ ＥＰＳ ｉｆ ｔｈｅ ｃｏｍｐａｎｙ ｈａｓ ｎｏｔ, ｏｒ ｄｏｅｓ ｎｏｔ, ｒｅｐｏｒｔ ｉｔｓ ｄｉｌｕｔｅｄ ＥＰＳ. Ａ ｌｏｗ Ｐ/Ｅ ｃａｎ ｂｅ ａｎ ｉｎｄｉｃａｔｏｒ ｔｈａｔ ｉｎｖｅｓｔｏｒｓ ｄｏｎ'ｔ ｈａｖｅ ｃｏｎｆｉｄｅｎｃｅ ｉｎ ｔｈｅ ｃｏｍｐａｎｙ ｏｒ ｉｔ ｃｏｕｌｄ ｂｅ ａｎ ｕｎｄｅｒｖａｌｕｅｄ ｓｔｏｃｋ. Ｉｆ ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｉｓ ｈｉｇｈ, ｉｔ ｃｏｕｌｄ ｍｅａｎ ｔｈｅ ｓｔｏｃｋ ｐｒｉｃｅ ｉｓ ａｒｔｉｆｉｃｉａｌｌｙ ｉｎｆｌａｔｅｄ. Ｉｔ ｃｏｕｌｄ ａｌｓｏ ｍｅａｎ ｉｎｖｅｓｔｏｒｓ ｈａｖｅ ａ ｌｏｔ ｏｆ ｃｏｎｆｉｄｅｎｃｅ ｔｈａｔ ｔｈｅ ｃｏｍｐａｎｙ ｉｓ ｓｅｔ ｔｏ ｄｏ ｂｉｇ ｔｈｉｎｇｓ. Ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｓｈｏｕｌｄ ｏｎｌｙ ｂｅ ｏｎｅ ｒａｔｉｏ ｉｎ ｙｏｕｒ ａｒｓｅｎａｌ. Ｄｏｎ'ｔ ｌｅｔ ｔｈｉｓ ｒａｔｉｏ ｂｅ ｔｈｅ ｌｏｎｅ ｄｅｔｅｒｍｉｎａｎｔ ｏｆ ｗｈｅｔｈｅｒ ｙｏｕ ｉｎｖｅｓｔ ｉｎ ｔｈａｔ ｃｏｍｐａｎｙ ｏｒ ｎｏｔ. Ｔｈｅ ｐｒｉｃｅ ｔｏ ｅａｒｎｉｎｇｓ ｒａｔｉｏ ｉｓ ａ ｇｏｏｄ ｓｔａｒｔｉｎｇ ｐｏｉｎｔ, ｂｕｔ ｙｏｕ ｓｈｏｕｌｄ ｄｏ ｓｏｍｅ ｆｕｒｔｈｅｒ ｄｉｇｇｉｎｇ ａｎｄ ｍｏｒｅ ｎｕｍｂｅｒ ｃｒｕｎｃｈｉｎｇ, ｂｅｆｏｒｅ ｙｏｕ ｉｎｖｅｓｔ ｉｎ ａｎｙ ｃｏｍｐａｎｙ. |
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