What Is A Prospectus And P/E Ratio?

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A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. 

A prospectus is filed for offerings of stocks, bonds, and mutual funds. 

The document can help investors make more informed investment decisions because it contains a host of relevant information about the investment security.

***Understanding Prospectus

Companies that wish to offer bond or stock for sale to the public must file a prospectus with the Securities and Exchange Commission as part of the registration process.

Companies must file a preliminary and final prospectus, and the SEC has specific guidelines as to what's listed in the prospectus for various securities.

The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction. 

However, the preliminary prospectus doesn't contain the number of shares to be issued or price information. 

Typically, the preliminary prospectus is used to gauge interest in the market for the security being proposed.

The final prospectus contains the complete details of the investment offering to the public. 

The final prospectus includes any finalized background information, as well as the number of shares or certificates to be issued and the offering price.

A prospectus includes things like:

*A brief summary of the company’s background and financial information

*The name of the company issuing the stock

*The number of shares

*Type of securities being offered

*Whether an offering is public or private

*Names of the company’s principals

*Names of the banks or financial companies performing the underwriting

Some companies are allowed to file an abridged prospectus, which is a document that contains some of the same information as the final prospectus.

Another reason a prospectus is issued is to inform investors of the risks involved with investing in the security or fund. 

Although a company might be raising capital through stock or bond issuance, investors should study the financials of the company to ensure the company is financially viable enough to honor its commitments.

Risks are typically disclosed early in the prospectus and described in more detail later. 

The age of the company, management experience, management's involvement in the business, and capitalization of the stock issuer are also described. 

The prospectus information also guards the issuing company against claims that pertinent information was not fully disclosed.

***Prospectus Example could be:

In the case of mutual funds, a prospectus contains details on the fund's objectives, investment strategies, risks, performance, distribution policy, fees, expenses, and fund management. 

Because the fees that mutual funds charge take away from investors’ returns, the fees are listed in a table near the beginning of the prospectus. 

Fees for purchases, sales, and moving among funds are also included, which simplifies the process of comparing the costs of various mutual funds.

Typically, high-cost funds charge fees in excess of 1.5%, whereas low-cost funds charge 1% or less.

As an example of a prospectus for an offering, PNC Financial (PNC) filed a prospectus with the Securities and Exchange Commission in 2019 requesting a new issuance of debt.

The senior note being offered to the public is a bond or a promissory note to pay a specific yield by maturity.

Now for a quick review, senior notes are debt securities, or bonds, that take precedence over other unsecured notes in the event of bankruptcy. 

Senior notes must be paid first if assets are available in the event of company liquidation. 

A senior note pays a lower coupon rate of interest compared to junior unsecured bonds since the senior debt has a higher level of security and a reduced risk of default.

***What Is Price-to-Earnings Ratio – P/E Ratio?

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). 

The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. 

It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

*P/E Ratio Formula and Calculation

Analysts and investors review a company's P/E ratio when they determine if the share price accurately represents the projected earnings per share. The formula and calculation used for this process is simple.

You simply must divide the current stock price by the earnings per share (EPS). 

The current stock price (P) can be gleaned by plugging a stock’s ticker symbol into any finance website, and although this concrete value reflects what investors must currently pay for a stock, the EPS is a slightly more nebulous figure.

EPS comes in two main varieties. 

The first is a metric listed in the fundamentals section of most finance sites; with the notation "P/E (TTM)," where “TTM” is a Wall Street acronym for “trailing 12 months.” 

This number signals the company's performance over the past 12 months. 

The second type of EPS is found in a company's earnings release, which often provides EPS guidance. 

This is the company's best-educated guess of what it expects to earn in the future.

Sometimes, analysts are interested in long term valuation trends and consider the P/E 10 or P/E 30 measures, which average the past 10 or past 30 years of earnings, respectively. 

These measures are often used when trying to gauge the overall value of a stock index, such as the S&P 500 since these longer term measures can compensate for changes in the business cycle. 

The P/E ratio of the S&P 500 has fluctuated from a low of around 6x (in 1949) to over 120x (in 2009). 

The long-term average P/E for the S&P 500 is around 15x, meaning that the stocks that make up the index collectively command a premium 15 times greater than their weighted average earnings.