Microsoft topped General Electric in market capitalisation on Monday, making the software giant the planet's most valuable company.
Microsoft had been breathing down GE's neck for months and hit market capitalisation on Monday of $US261.1 billion to GE's $257.3 billion. The companies were both valued at more than $300 billion in July before the recent stock market plunge.
Benefiting from the general robust health of the technology industry, Microsoft did not take as severe a hit when the market dropped and recovered more quickly than GE, a giant industrial, financial and services conglomerate in businesses ranging from aircraft engines to information services to television broadcasting.
GE is still far larger than Microsoft in terms of actual revenues -- for fiscal 1997, GE reported revenue of $90.84 billion [compared to the software maker's $11.358 billion].
Market capitalisation is arrived at by multiplying the share price of stock by the number of outstanding shares. Another important figure is the price-to-earnings (P/E) ratio, also called the "multiple," calculated by dividing the price of a stock by its earnings per share.
The P/E ratio helps investors keep tabs on how much is being paid for a company's earnings power. A higher P/E means investors are shelling out more because they expect higher earnings growth. A traditional rule of thumb is that any P/E with a multiple over 20 is considered high -- young, fast-growing companies (a characteristic of technology companies) typically have a higher multiple. A very high P/E also might suggest that a company's stock is overvalued and there is some sentiment among financial analysts that many technology stocks are indeed overvalued and due for a correction, or drop, in value.
Low P/E multiples usually occur with low-growth or older industries, including blue-chip companies with solid records of financial stability. Low P/E stocks typically have higher yields than high P/E stocks, which might not pay dividends to shareholders. A good example of the latter are the plethora of Internet startups, many of which have boasted high stock prices in the last year, but actually made no profits.
The P/E can be calculated using the previous year's earnings per share for what is called the "trailing P/E" or a financial analyst's forecast for the next year to arrive at the "forward P/E."
Based on Microsoft's stock closing price of $106 per share from Monday, the company has a trailing P/E of 40.3. Using GE's Monday stock close of $79.125 per share, the company has a trailing P/E of 31.65.