Price Earnings Ratio
P/E = Price / Earnings or Price per share / Earnings per share.
Present Value of Growth Opportunities (PVGO) is another alternative method for stock valuation. Present value of growth opportunities is calculated by finding the difference between price of equity with constant growth and price of equity with no growth.
PVGO = P(Growth) - P(No growth) = [D1/(r-g)] - E/r
where
P = Price of equity
D1 = Dividend for next period
r = Cost of Capital
E = Earning on equity
The P/E ratio (price-to-earnings ratio) of a stock (also called its “earnings multiple”, or simply “multiple”, “P/E”, or “PE”) is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share.
A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios.
The reciprocal of the P/E ratio is known as the earnings yield.
