What Is My Price Earnings Ratio?

Profitability Measures

Cash is king! But profit generates excess cash. What Is My Price Earnings Ratio? Understanding underlying business profitability is critical to a healthy and sustainable small business. PE Ratio is another measure to help you understand this profitability over time.

Price Earnings Ratio (PER)

A PE Ratio is based upon the assumptions used to create the EPS measure, this calculation is also based upon a strict asset value of the business and relates to the number of shares that are assumed to have been issued, and is then related to the EPS measure outlined above. Generally, the higher the Price/Earnings ratio the more likely it is that the company will be expected to further improve its performance in future years. Watch for changes over time, as value could be being eroded within your business

What does it mean?

For private companies, PER is not an exact science. The measure gives you a relative measure as to the value being derived from your revenues relative to your underlying equity structure. We do make assumptions however, that can derive a consistent indicator as to how efficient your business is in generating revenues relative to the total amount of equity within your business. Although not scientific, it can be used as a good barometer as to the progress of your business over time. Check your earnings per share now with Jazoodle

How we derive EPS?

Definition used:

Shareholder’s Equity Divided by Net Assets:

Divided by

Total Net Profit divided by Equity (amount)

eg: Net Profit $30,000, Total Equity $5,000, Net Assets $65,000

PER equals (5000/65000) / (30000/5000) = 0.13

How Can I Improve My Price Earnings Ratio?

If your company PER is reducing, there are a number of things you can assess to identify the cause, and then improve the score. As always, please work with your accountant or business advisor for individual advice for your business. PER is affected by the following:

  • Sales revenues.
  • Cost of goods (direct costs)
  • Overheads or expenses
  • Other non operating income or expenses
  • Financial structure of your company
  • Retained earnings

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