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Price to Earnings Ratio Definition. Price to Earnings Ratio Definition explained by professional forex trading experts the “ForexSQ” FX trading team. What is Price to Earnings Ratio. Some stock watchers, especially the novices, tend to fixate on numbers that the headlines dish in the blink of an eye: share price, the Dow Jones and S&P numbers and the IPOs of high-techs. But if there’s one number that people need to look at than more any other, it’s the Price to Earnings Ratio (P/E). But what does that mean, anyway? Wall Street loves its jargon the way former President Bill Clinton loved his hamburgers. And indeed: Among the Wall Street cognoscenti, P/E is one of those numbers investors throw around with great authority. But it doesn’t own the stats board. (Otherwise, all the other numbers wouldn’t matter.) In a nutshell, here’s how P/E works: 1) The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the most popular metric of stock analysis, although it is far from the only one you should consider. 2) You calculate the P/E by taking the share price and dividing it by the company’s EPS. That’s “earnings per share,” to de-jargonize another term. (Go ahead: Thumb your nose at that hedge fund guy and shout, “My NIK factor is up 100 percent … as in “now I know.”) 3) The formula: P/E = Stock Price / EPS. For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5). What does P/E tell you? The P/E gives you an idea of what the market will pay for the company’s earnings. The higher the P/E the more the market will fork over. Some investors read a high P/E as an overpriced stock. That may be the case. But it can also indicate the market has high hopes for this stock’s future and has bid up the price. Caution, though: It’s often hard to tell the difference between high hopes and “irrational exuberance.” A low P/E may indicate a “vote of no confidence” by the market … or it could mean this is a sleeper that the market has overlooked. Known as value stocks, many investors made their fortunes spotting these “diamonds in the rough” before the rest of the market discovered their true worth. What is the “right” P/E? The answer depends on your willingness to pay for earnings. The more you are willing to pay–which means you believe the company has good long term prospects over and above its current position–the higher the “right” P/E is for that particular stock in your decision-making process. Another investor may not see the same value and think your “right” P/E is all wrong. Confused? Fear not. But see how this works? Even the experts often puzzle over how to pick stocks based on P/E. In the end–and we can’t stress this enough–EVERY COMPANY IS DIFFERENT. To borrow from baseball, no one would confuse the New York Yankees with the Houston Astros, and that comparison changes from season to season. (Apple (AAPL) which was an innovator in Steve Jobs’ day, is a caretaker company in 2016 battling against slumping iPhone sales.) So for every company you scout for P/E, follow it carefully. Learn what you can about its management team, its place in a given sector (e.g., energy, high-tech, pharmaceuticals) and the opinions of expert analysts. Turn your P/E knowledge stash into potential investment cash. Earning Potential. DEFINITION of 'Earning Potential' The possible upside of the earnings that could be generated for each share outstanding of a particular stock. Earning potential reflects the largest possible profit that a corporation can make. It is often passed on to investors in the form of dividends. Greater earning potential drives up the price of a stock. BREAKING DOWN 'Earning Potential' Although earning potential can cause a stock's price to rise, it will not necessarily translate into higher current dividends. A company that comes out with an innovative new product may have higher earning potential in the future, but the projected revenue may not translate into actual profit for some time. Foreign Exchange Earnings. Definition: Foreign Exchange Earnings. Foreign exchange earnings refer to the monetary gain made by selling goods and services OR by exchanging currencies in global markets. Such markets are known as Foreign Exchange markets/ Forex markets. Foreign exchange earnings are denominated in convertible currencies, which means that even though the earnings come in the respective currencies of the countries where the products or services are sold, they have to be exchanged with the home currency in order to be calculated. Foreign exchange earnings can have two components- (a) Profits from the export of goods and services. (b) Profits from the conversion of currencies due to the difference in exchange rates. The exchange rates of the currencies are a function of the demand and supply of money in a given country and fluctuate with time. As explained by the money market equilibrium equation (LM curve), if the money supply increases in a country, the price of the currency generally decreases, and the converse holds true. The interest rate, set by the government, also affects the demand for money, and thus the amount of foreign exchange earnings that can be made from it. Money Market Equilibrium (LM curve) –>L= kY -hi. L= Money demand h= Sensitivity of money demand w.r.t interest k=Sensitivity of money demand w.r.t. Y Y= Aggregate demand i= Interest rate. Hence, this concludes the definition of Foreign Exchange Earnings along with its overview. Browse the definition and meaning of more terms similar to Foreign Exchange Earnings. The Management Dictionary covers over 7000 business concepts from 6 categories. Forex Education. Find definitions for key Forex trading terms along with introductions to the concepts, people and entities that impact the Forex market. Every month the Bureau of Labor Statistics releases employment data such as average hourly earnings which compiles averages from different sectors. This measurement is an indicator of future consumption. A big positive change means workers are getting paid more. If not erroded by inflation, an increase in earnings means more money to spend. Categories: Forex Trading Terms (Alphabetical) Risk Disclaimer: Online forex trading carries a high degree of risk to your capital and it is possible to lose your entire investment. Only speculate with money you can afford to lose. Forex trading may not be suitable for all investors, therefore ensure you fully understand the risks involved, and seek independent advice if necessary. Dividend Displacement Of Earnings. The concept that dividends paid now displace earnings in all future periods. Featured term of the day. Definition / Meaning of. Relative Strength. A stock's price change over a period of time relative to that of a market index, such as the s&p 500. The relative strength of a stock is calculated by taking the percentage price change of a stock over a set period of time and ranking it on a scale of 1 to 100 against all other stocks on the market, with 1 being worst and 100 being best. For example, a stock with a relative strength of 90 has experienced a greater increase in its price over the last year than the price increases experienced by 90% of all other stocks on the market. Some technical analysts, especially momentum investors, like stocks with high relative strength rankings, believing that stocks which have recently gone up are more likely to continue going up. Other technical analysts believe that a very high relative strength can be an indication that the stock is overbought and is ready to fall. Relative strength is really a "rear view mirror" metric, measuring only how the stock has done in the past, not how it will do in the future. Underlying Earnings. Earnings excluding nonrecurring components.Synonyms: persistent earningscontinuing earningscore earnings. Featured term of the day. Definition / Meaning of. Preference Shares. capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preferred stock. wiseGEEK: What Are Foreign Exchange Earnings? Foreign exchange earnings are profits made from selling goods and services in a global marketplace, though in some cases, currency is simply exchanged in order to make these earnings without goods or services being sold. These earnings come in the currency of the country where the products or services are sold, so they have to be exchanged in order to be calculated. Many businesses make large amounts of money from foreign exchange earnings, so this marketplace, known as the Forex market, is deemed important by many people in the world. Sometimes organizations can sell or trade to countries where the currency exchange is weaker or stronger in order to make more profits. The foreign exchange market is the largest market in the world and it generates a lot of money per day. Some organizations, such as banks, make foreign exchange earnings simply from trading one currency for another. This is done through contracts where two parties agree upon an exchange rate for currency and then buy or sell a certain amount. Instead of selling goods or services, currency is essentially what is being sold, which is a type of investment. Individuals can also make foreign exchange earnings by trading in the Forex market. There are many brokers, traders, and online companies available to make trading currency simple. It is also possible for individuals to lose a lot of money trading in this marketplace if they make a mistake. These types of earnings also take place when individuals trade one form of currency for another that is worth more, for instance, when traveling to a different country. The foreign exchange market is extremely volatile, which means that the price of the currencies of various countries is constantly changing. This affects the amount of foreign exchange earnings that businesses and individuals can make from day-to-day. The economy of a country greatly affects how much its currency is worth, so those involved in the foreign exchange market keep a close watch on the economic climate. Exchange rates are calculated based upon the supply and demand of money within a country. If more money is produced within a country, the price of the currency generally decreases, while if there is a shortage of money, the price increases. The interest rate, set by a country's government, also affects the overall value of the currency, which also affects the amount of foreign exchange earnings that can be made from it. Related wiseGEEK articles. Some organizations, such as banks, make foreign exchange earnings simply from trading one currency for another.