04-15-2017, 01:08 PM
Let's say you have a house worth 100,000 dollars. Suppose 10 of us wanted to become equal owners of this house. If each one of us recieved one "share" to represent our ownership of this house, then a single share would cost 10,000 dollars. If instead of 1 share per owner, suppose we give each owner 10 shares for a total of 100 shares in total. Each share of this house would now be worth 1,000 dollars. Basically, the total value of the company divided by the number of outstanding shares should equal the price of a share. The question becomes what is the correct total value of a company. This is where P/E ratios come into the picture. A common way to estimate a companies value is with current company earning and expected future growth. A trailing 12 month p/e compares the actual company earnings over the past year versus the current share price. For low growth companies, you would expect a p/e between 10 and 20. For high growth companies it will usually be higher.