Hey Everyone, Welcome to our blog in which today we will be talking about the What Is Negative P/E Ratio? So that you will have deep knowledge about this ratio and you will be able to share the knowledge with your students or persons too.
P/E stands for Price To Earning ratio, it is used to get a result if a stock is cheap or expensive. it will help you to know how many dollars you have to pay for each dollar of annual earnings.
If you are seeing or if PE ratio is indicating that it is high then it means that stock is expensive while if there is indicating low PE ratio then it means the stock is cheap. So without wasting any more time let’s know about the What Is Negative P/E Ratio?
What Is Negative P/E Ratio?
A negative PE Ratio means that the stock is getting negative earnings, meaning we can say that the company has been losing their money in the last 12 months. If you want to calculate the formula of PE ratio is –
PE ratio = Stock Price / Earnings Per Share
If you are seeing that Earning Per Share ( EPS ) is getting lower than 0 ( Zero ) then it means the stock is getting a Negative PE Ratio. Earning Per Share ( EPS ) is not always right, So It does not always say that stock is a bad investment. It depends on many factors.
The stock price will never be negative, so this is only a mathematical method to know that if you are getting a negative sign then it means there is a Negative EPS ( Earning Per Share ) Number.
A Negative EPS ( Earning Per Share ) means that stocks have negative net income ( net losses ) from the past 12 months, it does not mean that all of the quarters were negative, it’s just that the total number was lower than zero.
For Example – If the Earning Per Share of the last four quarters was +2, +3, +4 and -11, that means the result of EPS ( Earning Per Share ) will be -2 and that’s why the PE ratio has become negative.
Are You Thinking of Buying A Stock If It Has A Negative PE Ratio?
You will be surprised after knowing that many people invest their money in a Negative P/E Ratio. To get an example, you have to keep your eyes on the company that had losses for a long time or they have just lost recently.
If the company is getting losses, that means the company is in trouble, but if it is just starting to lose their money recently, there will be chances to be caused by accounting effects or one-time expenses.
It is also important to always check another similar company that has the same industry and look at their earnings. If most companies have losses then this means the entire industry is in a temporary cyclical downturn.
You have one method to see their negative earnings and negative PE occurring by accounting is to look at the Cash Float Statement. that will tell you if the company is actually spending more cash than they take in, or if their negative earnings were due to accounting rules.
Why Is The Negative PE Ratio Confusing?
A Negative PE Ratio is very confusing because the significance of any big and small number is inverted or we can say that if you have a very negative number then it is better than a number which is just being negative.
Trailing VS Forwarding P/E Ratio
As we know that Trailing means that past and forwarding means future, so if you have the question that what is trailing p/e ratio then it means that
Measurement of your Earning Per Share stock of the last or past 12 months.
But if you have the question of what is forwarding P/E ratio then it means that you can measure the money that you have invested in Earning Per Share stock in the coming 12 months. So this is the meaning of Trailing Vs Forwarding P/E Ratio.
Trailing P/E Ratio
It is the method that is derived for the earnings per share of stock in the past 12 months rather than future time. There are many investors that use this method because it is very objective that is based on already recorded figures rather than predicted.
Please don’t always trust on calculations of analysts or figures that have been published by any company.it has also a disadvantage like there will not correlate your past earnings with future earnings.
As we know the stock market always fluctuates so that the price of stock yesterday is not always a good indication of the price tomorrow.
Forward P/E Ratio
As we already have told you that it is responsible for derived from projected future earnings, It is an estimate so that it is also known as Estimated P/E Ratio. It is very useful for comparing your current earnings with future earnings to know about the estimated growth.
If you provide them accurate projections then it will be able to give an insight to investors about stocks that are likely to experience growth.
What Is A Good P/E Ratio?
A Good P/E ratio is responsible for sharing consistent growth and the actual number for a company can be varied. P/E ratio can give you results wrong if you want to get the result without considering their recent history.
If any company that has a P/E ratio is accurate value then the stock will be a safer option rather than risky money on a stock that will be undervalued.
Limitations of P/E Ratio
One of the biggest limitations of P/E is that it is very difficult to use it when you are comparing companies within industries. And we also know that when we compare different industries will have widely different P/E ratios.
Conclusions Of What Is Negative P/E Ratio?
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