I still dont get PE ratios?

Question

I'd really appreciate it if someone can tell me what a PE ratio can tell about a company? The more detail the better thx for the help

Answer 1

p/e = stock price divided by earnings per share

it basically is a quick and dirty way of figuring your payback period.

every point of p/e is 1 year (assuming current earnings to be perpetually constant) that you would have to wait before the company actually earned what you paid for it.

Answer 2

Go with the PEG ratio, e.g.,

http://finance.yahoo.com/q/co?s=T

Because it takes into account Growth and you can compare companies

Answer 3

The smaller, in general, the better; however, you want to make sure that cash-flow earnings are strong. I have a value investor bias.

It's price / earnings whereby that's how you compute market capitalization. Basically, it says how many times earnings $2B would a $48B company demand. The company is trading at 24 times earnings. For a tech company, that may or may not be good. For a retailer, that might signal disaster or it may signal a firm that's growing faster than its peers.

Answer 4

When you buy a stock you a buying a piece of the company.  The PE give you an idea of how much the company in making for each share you buy.  To get a better understanding look at it as if it were the whole company, for some reason this helps because it takes out all the per share stuff.  If you could buy the whole company for $1 million, and the company was making $100 thousand, the pe ratio would be 10, price over earnings =1,000,000/100,000=10.  This ratio give you an idea of how much a company is currently making relative to the purchase price.  Since most of us don't buy the whole company, but shares of stock, the PE ratio is stated in per share terms.  If you were to buy the company in my example it would take 10 years (assuming no growth of earnings) to equal the purchase price of the company.  

When looking at PE's it can be useful for comparison of different sized companies, but this is only one point of data, it is not the end all for comparison sake.  Two companies in the same industry may have dramatically different PEs because one is the industry leader and the other a laggard.  It is a starting point but a fundamental ratio every investor should understand.