1/23/2024

P/E ratio is N/A: what does this mean?

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One of the most well-known metrics in fundamental analysis is the P/E ratio, which compares a stock’s price to its earnings. Benjamin Graham, the founder of value investing, considered the P/E ratio to be one of the best ways to assess a stock’s viability and growth potential. However, what if the company does not know this indicator? We will tell you in more detail in this article.

 

Calculation of P/E ratio

Analysts use the P/E ratio to understand how much investors and traders are willing to pay for a company’s shares. The indicator is calculated as the ratio of the current stock price to its profit.

A high P/E ratio means that investors are willing to pay more per share than the company earns. This could be a sign that investors expect the company’s earnings to grow quickly or that the stock is overvalued.

A low P/E ratio demonstrates that players are willing to pay less per share than the company makes in profit. Here, on the contrary, investors expect the company’s earnings growth to slow or that the shares are undervalued.

The P/E ratio can be used to compare stocks of companies in the same industry or the same company over different periods of time. For example, if a company’s P/E ratio is 15x, that means its shares are trading at 15 times the company’s earnings. If that company’s direct competitor has a P/E ratio of 10x, then the competitor may be considered a more attractive investment opportunity because its shares are cheaper.

 

Why do companies get P/E=N/A

A stock’s P/E ratio is sometimes listed as “N/A,” which means “not applicable” or “not available.” This can happen for two reasons.

The first of them is that at the time of compilation of the report there is no data on the company’s profit. This may be because the company was recently incorporated and has not yet released an income statement, or because the company is in the process of reorganization or restructuring.

The second reason is that the stock’s P/E ratio is negative. Negative P/E ratios are mathematically possible, but they don’t make sense in the context of stock valuation. Therefore, they are usually listed as “N/A”.

 

How to analyze the P/E=N/A ratio

So what should you do if you come across a company that has a P/E ratio of N/A?

Investors often interpret “N/A” as a company reporting a net loss. But this value is not always a cause for concern.

Fast-growing companies in the semiconductor or biotech often lose money in the first few years as they experience rapid expansion or growth, expand their customer base, and develop new products and markets. In this case, the company is expected to make a profit, but in the short term it will have to spend these funds to accelerate growth and earnings. Amazon is a prime example of a company that has lost money year after year, but remains the market leader in terms of share price and market capitalization.

However, companies with a P/E=N/A ratio may also indicate signs of trouble. If a company has historically had profits and then their numbers turn negative, this could indicate financial problems or that the business is in a dying industry.

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