Is NVIDIA's High P/E Ratio Good?
$NVIDIA (NVDA.US)$ rallies around 6% today for the $40 billion acquisition with SoftBank, anyone missing out?
Shares of NVIDIA have more than doubled from the March coronavirus lows. Notablely, the price to earnings ratio (PE) grows as well.
NVIDIA has a P/E of 94.48, based on the last twelve months. That means that at current prices, buyers pay $94.48 for every $1 in trailing yearly profits. And it is much higher than the average company (27.79) in the semiconductor industry.
What is P/E and how to calculate?
P/E ratio is the ratio of a company's share (stock) price to the company's earnings per share. The ratio is used for valuing companies and to find out whether they are overvalued or undervalued.
There are multiple versions of the P/E ratio, depending on whether earnings are projected or realized, and the type of earnings. Ttrailing P/E we mentioned above is widely used, it uses the weighted average number of common shares in issue divided by the net income for the most recent 12-month period.
The formula of trailing P/E is:
P/E=Share Price / Earnings per Share(EPS)
What factor impact P/E ratio?
Eranings growth is the most important factor in determining what P/E a company trades on. Earnings growth means that in the future the ‘E’ will be higher. it alos means even if the current P/E is high, it will reduce over time if the share price stays flat. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
NVIDIA earnings per share for the twelve months ending July 31, 2020 was $5.44, a 22.8% increase year-over-year.
Is a high P/E ration good?
The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn’t necessarily good or bad, but a high P/E implies relatively high market expectations of what a company can achieve in the future.
NVIDIA's relatively high P/E ratio indicates that NVIDIA shareholders think it will perform better than other companies in its industry classification.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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