Price Earnings Ratio and Flow Discount

The Price Earnings Ratio, Concept and Calculus
The PER or P/E (Price Earnings Ratio) is the quotient between the price of the stock market action and the earnings per share.

Normally in order to calculate the Price Earnings Ratio, the benefit that is hoped for throughout the course of the year is used, although it is also common to calculate it with last benefit. This is used simplistically to value a company or establish what a company's stock should be worth.

The PER tells us how many dollars we pay for each dollar of benefit that the company promises. In theory, the less we pay the better it is. The PER is also the inverse of the profit that the action promises, since the earnings per share are the hoped for benefit of the action (assuming the BPS is constant throughout the years) and is also the inverse of the PER. In other words, if we buy a share of a PER of 10, we are hoping for a yield of 10 by 100, if we buy it from a PER of 20, we will be hoping for a yield of 5 by 100.

The PER gives us a first idea about how expensive or cheap a share is or an entire stock. Habitually, the agents compare the PER of shares from the same sector and from the same stock to see which is the cheapest. The PER is also used along with a stock in order to compare it with another and see which market is more attractive.

The PER is simply instrument of appraisal of stock; therefore, to start to understand it we need to go back to the first principles of appraisal of stock based on the discount of flow and in order to do that we first need to talk about the value of money at the time.