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The P/E ratio, therefore, represents how much an investor needs to pay for every dollar of earnings the company has achieved in the previous financial period
The P/E ratio, therefore, represents how much an investor needs to pay for every dollar of earnings the company has achieved in the previous financial period.
The table below provides information on the shares of Singapore’s three leading banks for 2018.
|
Bank |
Share Price S$ |
Price to Earnings Ratio (P/E) |
|
DBS |
25.08 |
11.67 |
|
OCBC |
11.10 |
10.47 |
|
UOB |
25.00 |
10.73 |
Required:
From the above information, which bank’s share represents good value? Explain.
1 mark
What other factors should an investor consider when making the decision on which bank share to purchase in 2019?
Expert Solution
P / E Ratio = Market price / Earning per share
Using The formula
| BANK | Share Price | P/E Ratio | EPS |
| DBS | 25.08 | 11.67 | 2.15 |
| OCB | 11.10 | 10.47 | 1.06 |
| UOB | 25.00 | 10.73 | 2.32 |
Through this table we can see that Bank UOB has higher EPS therefore this bank should be selected beacuse It gives higher earning per share.
Other factors to be kept in mind while purchasing share of bank are as follows:-
- Debt - equity ratio - which help us to measure the debt to equity of the bank.
- Return on equity - examines the profitabilty from the prespective of the investor.
- Dividend per share - the amount of profits distributed to shareholders per share is known as DPS.
- DP ratio - Dividend payout ratio is between DPS and EPS of the firm i.e. proportion of EPS distributed by the company as dividend.
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