What is the difference between the value of a share and the price of a share?

The earnings per share thus make a statement about how successful the company has been with its business model over the last few years and how much of this profit ultimately goes to the individual shares of the investors.

The current share price, on the other hand, is the result of the interplay of supply and demand. And this does not always have anything to do with a purely rational valuation by investors. A large proportion of investors on the stock exchange act de facto irrationally and do not carry out any in-depth analysis. With modern online brokers, the barriers to entering stock trading are even lower. Thus, even more non-professional players participate in the market.

This means risks on the one hand, but also opportunities for you. Negative news about a company so quickly creates the stock market psychological effect that many investors sell their shares at once and the price thus falls rapidly.

On the one hand, however, the news may be short-lived and, on the other hand, the valuation by the market may no longer correspond to the intrinsic value of the share. So now you buy the security for a very low price compared to its potential. This is called value investing.

To detect such a discrepancy between market value and book value or earnings per share, you use ratios such as the P/E ratio and the price-to-book ratio (P/B ratio). You come across undervalued shares, which are also called value shares in stock market slang.

•     The current price of a share says something about how the company is valued by investors (keyword market value).
•     In the case of earnings per share, the annual net profit is broken down to the individual shares. One can speak of an intrinsic value of the share.
•     Often there are large differences between the intrinsic value and the price, which develops through the interplay of supply and demand.
•     In the case of bad news, the share price is often lower than the EPS
•     The lower the result of the P/E ratio, the more undervalued the share is in relation to the last annual result
•     The higher the P/E ratio result, the more expensive the share is compared to its actual intrinsic value.

Interpretation: How to use the P/E ratio for your investment

Investors can use the P/E ratio primarily for the initial assessment of a company. They use it to calculate whether the security is cheap or expensive compared to its potential. In doing so, it is essential that you also draw references to other companies in the sector. The ratio should therefore be evaluated in a more contextualised way. Only after you know the mean value within the segment can you assess whether the company P/E ratio is high or low.

Higher P/E ratio - what does it mean?

If the P/E ratio is higher compared to other companies in the sector, the share is relatively expensive. Here it may be that investors already see high opportunities in the future, for example because the technology being produced is so advanced and innovative.

It may be that last year's turnover and profits were still low, for example, also due to high investments, but the shares are already valued higher by the players on the stock market.

With a high P/E ratio, the ratio signals not only a possible overvaluation, but possibly the prospect of high profits in the industry. It is therefore important in any case to uncover the reasons for the figures in order to be able to make a correct analysis and act correctly.

Lower P/E ratio - good or bad?

A low P/E ratio signals that the share is rather cheap to have despite a high intrinsic potential (strong profits and turnover of the company). Investors have possibly discovered a value share with their calculation, i.e. a security that one buys cheaply and thus achieves immense growth in the coming years.

Here too, however, one should know the reasons for the low valuation on the mt4. For example, if the company was successful with a certain technology last year and thus achieved high sales, but this technology will probably be replaced by an alternative in the near future, investors will be less interested in it.

Share prices fall despite good figures in the past. The same could happen if bad news about the company circulates. In this case, the share price falls briefly and no longer represents the actual strength of the share. Such a constellation at least offers opportunities for a quick, cheap investment before the share price makes a comeback.