Do you want to invest in stock with a higher or lower price to earning ratio? Which factors determine this?

Question

which is more attractive for investors? Stock with a high or lower price to earning ratio ? Which factors determine what a stocks price to earnign ratio will be ?

Answer 1

There really is no magic number which can tell which stock will be the best investment. If you are planning on holding a stock for 5 years or more then the numbers can be important, but there are so many other factors involved that picking stocks is as much art as science. Especially in a bear market, the numbers mean very little, everybody gets hit. If you don't have experience, leave it to the professionals.

Answer 2

You want something in the middle (14-18)

If it's too low, then that means that the stock has a low price compared to its earnings, and something else must be dragging the price down (such as incompetent managers, or trouble brewing on the horizon)

If it's too high, then that means the stock is overinflated, and is ripe for a crash (2000 dot coms had P/Es in the hundreds)

Answer 3

Use the earnings yield.  It takes the guess work out of it.  The EY is the inverse of the PE ratio.  Take next years expected earnings and divide by the current price.  The higher the better.

Answer 4

It really depends on the stock's earnings growth rate as well.  Use the PEG ratio to help determine valuation.  Try to stay with stocks that have a 1.5 PEG or less for long-term investing.  Also, look at the debt-to-equity ratio to assure the company is not too leveraged.

Of course, you must have confidence that these numbers are believable so consult as many sources of information as possible (especially the growth rate which is generally a consensus prediction by analysts).

Read as many of the reports out there as you can (Ford Equity, S&P, Street.com, etc.)