Dell’s has a profit margin of 3.8 percent on sales of
7.11 per share. What is the price-earnings ratio? Can you provide the formula?
The Correct Answer and Explanation is:
To calculate the price-earnings (P/E) ratio, we need to use the formula:P/E=Price per ShareEarnings per ShareP/E = \frac{\text{Price per Share}}{\text{Earnings per Share}}P/E=Earnings per SharePrice per Share
Given:
- The profit margin is 3.8%.
- The sales per share is 7.11.
Step 1: Calculate Earnings per Share (EPS)
The profit margin is the percentage of sales that translate into profits. Therefore, we can calculate the earnings per share (EPS) using the formula:EPS=Sales per Share×(Profit Margin100)\text{EPS} = \text{Sales per Share} \times \left( \frac{\text{Profit Margin}}{100} \right)EPS=Sales per Share×(100Profit Margin)
Substitute the given values:EPS=7.11×(3.8100)\text{EPS} = 7.11 \times \left( \frac{3.8}{100} \right)EPS=7.11×(1003.8)EPS=7.11×0.038=0.27018\text{EPS} = 7.11 \times 0.038 = 0.27018EPS=7.11×0.038=0.27018
So, the earnings per share (EPS) is 0.27018.
Step 2: Calculate P/E Ratio
Now, we can calculate the P/E ratio using the price per share (which is not provided explicitly but can be derived from financial data, such as market price). Since the price per share is typically known or assumed for such calculations, if we have this number, the P/E ratio would be:P/E=Price per Share0.27018P/E = \frac{\text{Price per Share}}{0.27018}P/E=0.27018Price per Share
For instance, if the price per share of Dell is $30, then:P/E=300.27018≈111.09P/E = \frac{30}{0.27018} \approx 111.09P/E=0.2701830≈111.09
Conclusion
The P/E ratio can be calculated by dividing the price per share by the earnings per share (EPS). You can calculate the exact P/E ratio once you have the price of the stock. The formula for the P/E ratio is crucial in evaluating how much investors are willing to pay per dollar of earnings. Higher P/E ratios can indicate higher growth expectations, while lower P/E ratios may suggest undervaluation or less growth potential.
