The shares of a corporation, profit and PE-ratio
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The shares of a corporation, profit and PE-ratio
When a corporation is created, it always has 100.000.000 shares. The shares are owned by either the country that has set it up, or by an Enterprise, if it is a private corporation.
When a corporation is being taken over by another enterprise it means that all 100.000.000 shares of the corporation are bought by the new owner. State corporations, National corporations and private corporations always have only one owner who owns all the shares of the corporation.
The profit of the corporation, after payment of taxes, divided by the number of shares of the corporation is the profit per share. If the profit for a year was 200 M and there are 100 M shares, then the profit per share is 2. We look at the profit per share for the past period, not the last month. To make sense, we look at the profit for one year or even longer.
In state owned or Enterprise owned corporations, the share price of the corporation is computed by the market value, divided by the number of shares. The market value depends on the profit of the corporation, the assets it has, debt etc. For public corporations, whose shares are traded on the stock exchange, the share price is decided on the market. Their market value is that share price multiplied by the number of shares. {text] Based on the share price and the profit per share, we can determine the P/E-ratio (Price Earning ratio). This is the share price divided by the earning per share.
If the share price is 20 and the profit per share 2, then the PE-ratio is 10. The share costs ten times the profit per year. It means that the share can bring 10% profit per year.
If the profit per share was 4, the PE-ratio would he 20 divided by 4 which is 5. This means that the share price is only 5 times the profit per share. This is equivalent to 20% profit per year. A low PE-ratio is better than a higher one.
Corporations with good profits and a low PE-ratio tend to increase in value. Purchasing these shares and selling when their value goes up can be attractive.
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