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Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. Trevor R. Randall - CA Insurance License #0I08678

 

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Using P/E Ratios


The price/earnings (P/E) ratio is the price you pay for $1 of a company’s earnings. For example, if a company reports basic or diluted earnings of $2 per share and the stock is selling for $20 per share, the P/E ratio is 10 ($20 per share divided by $2 of earnings per share). This ratio helps you determine if a stock is over or undervalued, helps compare companies in the same industry, and helps to compare the return you are actually earning from the company compared to other investments, such as bonds or real estate. Here’s how it works. Both company A and B are selling for $50 per share. Company A has reported earnings of $10 per share, and company B has reported earnings of $20 per share. Company A’s P/E ratio is 5, while company B's is 2.5. Company B is cheaper and providing twice the earning power because for the same share price, an investor is getting $20 of earning as opposed to $10 of earnings. There are also variances in P/E ratios by industry, because there are different expectations for different types of business. Technology companies typically sell at larger P/E ratios, because their growth rate and earnings are higher. The bottom line is you have to do your homework. If you want to buy a stock because it has an attractive P/E ratio, make sure you know why. It may be a great stock to purchase and is just undervalued, but make sure you know if the company is losing business or is poorly managed. It may also be that the entire industry is weak. Don’t just buy a stock because it’s cheap. Many investors also use the price/earnings to growth ratio, also known as the PEG ratio, because it also factors in the growth rate of a company.

Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874­-6910. Randall Wealth Management Group and PlanMember Securities Corporation are independently owned and operated. PSEC is not responsible or liable for ancillary products or services offered by Randall Wealth Management Group or this representative. CA Insurance License: #0727953.

This newsletter was prepared by Integrated Concepts Group, Inc. The opinions expressed in this newsletter are for general information only and are not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation. Material presented is believed to be from a reliable sources and PSEC makes no representation as to it accuracy or completeness.

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