The Price Earnings Ratio

The profit number you hear discussed most often in the financial news is the price/earnings ratio, or the P/E ratio. Basically, the P/E ratio looks at the price of the stock versus its earnings. For example, a P/E ratio of 10 means that for every $1 in company earnings per share, people are willing to pay $10 per share to buy the stock. If the P/E is 20, that means people are willing to pay $20 per share for each $1 of company earnings.

Why are people willing to pay more per dollar of earnings on some stock? Because the people who buy the more expensive stock believe the stock has greater potential for growth. This ratio is used when valuing stocks and is one of the oldest measurements in the world of stock exchanges.

&\NG/ On its own, the P/E ratio means very little, but as part of an overall evaluation of a company, the P/E ratio helps you interpret earnings results. Never make a decision about whether to buy or sell a stock based solely on the P/E ratio. Nonetheless, a negative P/E or a P/E of zero is a major trouble sign, indicating that a company isn't profitable.

0 0

Post a comment