What Can P/E Ratio Tell You?

The p/e ratio is a popular way to value stocks. Many investors regularly use this ratio when making important investment decisions. Here are the basics of the p/e ratio and what it can tell you.

P/E Ratio

The p/e ratio is calculated by taking the market value of a share of a particular stock and dividing it by the earnings per share of the stock. This will give you a number that you can use as the price earnings ratio.

Importance to Investors

The price earnings ratio can be a way to determine whether a stock is currently being over or undervalued in the market place. However, the number by itself does not really tell you much. Most investors will compare the price earnings ratio of one company to the price earnings ratio of another company or financial index. In most cases, you will want to compare companies that are in similar industries in order to get an accurate comparison.

A company with a higher price earnings ratio is considered to be poised for more growth than a company with a low price earnings ratio. Therefore, if you are basing your investment decision on this factor, you would look to buy when the price earnings ratio is higher.

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