Finance and Growth Strategies
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Finance and Growth Strategies
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Price-to-earnings ratio
The price-to-earnings ratio is a very common method for valuating companies that are not entirely asset-based. The P/E ratios for publicly-traded companies are regularly calculated and reported because the ratios are good barometers for the value of those companies at a given time (Zonis 2001). P/E ratios are important as a valuation method because they look beyond the simple bricks-and-mortar assets of a company, and put a price on a companys good will and the value of its brands. P/E doesnt just look at the assets, but what kind of return the company is getting on them, which can take a variety of less-tangible pieces of the companys operation into account (such as brand value, distribution efficiency, etc.)
Calculating a public companys P/E value is relatively straightforward. To start, the price of the companys stock is divided by its earnings per share. Lets imagine a company with a stock price of $10 a share, and earnings of $1 a share. We divide $10/1 and get a result of 10. We multiply the 10 by the companys annual net income (lets say its $100,000) and we get a value of $1 million (Business Valuation No date). While P/E
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