Stock Price/Earnings?

Question

Im learningn about stock and stumped. What does it mean when your reading about a stock and it says P/E. What is it good for. What is it? What does it indicate?How does it effect me makeing money?

Answer 1

To put it very simply, investors use the P/E ratio to get a rough estimate of the relationship between a stock's price and the value of the company.

In mathematical terms, the ratio is:

The price of the share

divided by

The Annual Earnings of the Company (per share)

So if the P/E ratio is 1, then the company earns exactly the same as the sum of the value of all its stocks. If a company has a really high P/E ratio, it could be a sign that the stock is overvalued, because you're paying a lot of money for every dollar of earnings.

But... a high P/E ratio also indicates that people are expecting big things in the future out of the company - this is why tech companies tend to have high P/E ratios - because they tend to be working on speculative technologies that may or may not turn out as expected.

Now, of course, there's a lot more you could say about the P/E ratio, but I hope that helps get you started!

Answer 2

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Answer 3

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Answer 4

it tells you how much people are willing to pay for a particular stock.

usually if p/e ratio is too high it may be because it's a high growth stock or starting to get too expensive

use PEG ratio, it's PE / growth ratio.  that tells you if a stock is overvalued (above 1) or undervalued (under 1)

also, compare pe, peg with other stocks or the sector itself to see if your stock is too expensive or too cheap compare to other stocks.

Answer 5

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Answer 6

easy example:  Company earns $1 per share per year.  Price of the company's stock is $25, so P/E ratio is 25.  Other companies in the same business have P/Es from 14 to 19.   Over the past 76 years, the average P/E of all stocks in the S&P 500 is around 16.  This shows your stock may be overvalued and not a good investment.  Do not make investment decisions on P/E ratio alone.  Even though the PE is higher than its peers, maybe the company has a new product coming out that is so much better than anyone else's so it may be undervalued.