Friday, October 14, 2005

P/E ratio-Negative...

A stock can have a negative price-to-earnings ratio (P/E), but it is very unlikely that you will ever see it reported. Although negative P/E ratios are mathematically possible, they generally aren't accepted in the financial community and are considered to be invalid or just not applicable. I'll explain why this is.

A company whose stock has a negative P/E ratio is not making money: earnings at the company are negative, which means the company is losing money on the shareholder's investment in the company.

To calculate the P/E ratio, you divide the market price per share of a company's stock by the company's earnings per share. A company's earnings per share are calculated by subtracting the total value of all dividends paid to preferred shareholders from the company's net income and dividing the difference by the average outstanding shares over the time period for which the ratio is being applied.

In any case, if the company's net income or EPS figures are negative, these losses may be indicated mathematically by a negative P/E ratio for a certain period of time. Negative EPS numbers are usually reported as "not applicable" for quarters in which a company reported a loss.

0 Comments:

Post a Comment

<< Home