How To Determine The P/E Ratio Of Penny Stocks?

Normally investors are interested in knowing the P/E ratio of penny stocks after knowing their prices. P/E is the ratio of share price of a stock to the earning per share of the same stock. One can arrive at the P/E ratio of a stock by dividing the stock price per share by the earning earned per share. The stock price per share means the market price of each share of the stock and the earnings per share means the company’s profit after deduction of tax divided by the number of outstanding shares.

A company's per-share earnings are simply the company's after-tax profit divided by quantity of outstanding shares. If a company has earned a profit of 5M last year and has a million shares as outstanding shares, then the earning of each share would be 5, which is arrived by dividing 5M divided by 1M. If the same company sells it shares at 50/share, then its P/E would be10 which is arrived by dividing 50 by 5.Higher the P/E ratio of penny stocks, the better will be the performance of these stocks.

Traditionally, P/E ratio is calculated by taking the trailing earnings as the base. A trailing earning means the earning of a stock during the last one year. But in some cases, it is calculated on the projected annual earning. For the majority fraction, a high P/E is simply an indication of high anticipated income in the future. But actually the P/E ratio cannot be considered as a whole lot even though it is helpful for making a comparison of the P/E ratios of other penny stocks in similar industries.

Sometimes the one-time gains or losses from a quarterly earnings report are not included by some of the stock analysts. So, it’s natural that the P/E ratio so calculated would be misleading. For calculating the P/E ratio, the annual earning figure is required, but some companies may delay in submitting their annual reports. And the method of calculating the P/E on estimated earnings would be folly because income should not be taken into consideration until they are realized in real terms.

If P/E is considered as an indicator, then it can be best viewed over time by investors. A company is suspected to be more speculative, if it has a progressively rising P/E. Because the stock price of penny stocks change every day, the P/E ratio of these stocks keeps changing with their prices.