Question

What was the share price/earnings ratio of Doing Well Inc at the time of going to press? $$ \begin{aligned} &\begin{array}{|lr|} \hline \text { Group turnover } & \$ 3.3 \mathrm{bn} \\ \text { Pre-tax profit } & \$ 236 \mathrm{~m} \\ \text { Earnings per share } & \$ 5.84 \\ \text { Share price } & 8 \text { cents } \\ \hline \end{array}\\\ &\text { Year results of Doing Well Inc - all figures correct at time of going to press } \end{aligned} $$

Short answer

The P/E ratio of Doing Well Inc is approximately 0.0137.

Step-by-step solution

- Identify the Formula

The share price/earnings ratio (P/E ratio) is calculated using the formula: \ \[ \text{P/E Ratio} = \frac{\text{Share Price}}{\text{Earnings Per Share}} \]

- Insert the Given Values

From the data provided: \ \[ \text{Share Price} = 8 \text{ cents} = 0.08 \text{ dollars} \text{ (as there are 100 cents in a dollar)} \] \ \[ \text{Earnings Per Share} = 5.84 \text{ dollars} \]

- Perform the Calculation

Substitute the values into the formula: \ \[ \text{P/E Ratio} = \frac{0.08}{5.84} \] \ Calculate the result: \ \[ \text{P/E Ratio} \approx 0.0137 \]

- Verify the Result

Ensure that the calculation is correct and the units are consistent. The P/E ratio is typically a unitless number which indicates how much investors are willing to pay per dollar of earnings.

Key concepts

share price/earnings ratio

The share price/earnings ratio, or P/E ratio, is a crucial metric used in financial analysis. It tells investors how much they are paying for each dollar of a company’s earnings. To find this ratio, divide the share price by the earnings per share (EPS). For example, if Doing Well Inc has a share price of 8 cents or 0.08 dollars and EPS of 5.84 dollars, the P/E ratio is computed as follows:
\[ \text{P/E Ratio} = \frac{0.08}{5.84} \approx 0.0137 \]
This low P/E ratio can mean that the company's shares are undervalued, indicating that investors might be skeptical about the company's future growth. Alternatively, it could be a sign of a stable investment with modest returns.

financial calculations

Performing financial calculations accurately is fundamental for investment analysis and quantitative reasoning. When you calculate the P/E ratio, follow these steps: Identify the necessary formula, insert the given values, and perform the calculation.
Here’s a simple guide:

• Identify the formula: \[ \text{P/E Ratio} = \frac{\text{Share Price}}{\text{Earnings Per Share}} \]
• Insert the values: \[ \text{Share Price} = 0.08 \text{ dollars}, \text{EPS} = 5.84 \text{ dollars} \]
• Calculate: \[ \text{P/E Ratio} = \frac{0.08}{5.84} \]
• Round the result: \[ \text{P/E Ratio} \approx 0.0137 \]

These steps simplify the seemingly complex task of financial ratio calculations.

quantitative reasoning

Quantitative reasoning involves using mathematical concepts to solve real-world problems. To compute the P/E ratio, begin with clear thinking and logical steps.
First, understand what each term represents. The share price is how much one share costs. Earnings per share (EPS) show how much profit each share generates. The P/E ratio then, tells you the relationship between these two.
By following steps to identify the formula, inserting the values, and performing the division, you show your quantitative reasoning skills. Always verify your results to make sure they are sensible and consistent with the data provided.

investment analysis

Investment analysis involves evaluating financial data to make informed investment decisions. The P/E ratio is a critical tool in this regard. A lower P/E ratio might suggest that a stock is undervalued, making it a potentially good buy, but it can also indicate low growth expectations.
Conversely, a high P/E ratio might imply that a stock is overvalued or that investors expect high growth rates. To make the best use of the P/E ratio, compare it with industry standards and historical figures. For instance, if Doing Well Inc. has a P/E ratio of 0.0137, find out if this is normal for its industry.
Combining the P/E ratio with other metrics like dividend yield, return on equity (ROE), and debt-to-equity ratio will provide a more comprehensive view of the company's financial health and investment potential.