what is a p/e ratio, and how is it calculated?

Answer 1

Price-Earnings Ratio - P/E Ratio

Price to earnings is the relationship between the stock's price and their annual earnings per share (EPS).

So a stock that earns $2/share and sells for $60 has a P/E of 30.

The theory is if a stock has a low P/E, then it might be undervalued and eventually the stock market will realize this and the stock's price will increase.

However, you must be careful. Some industries have low P/Es in general and some (like some internet companies used to) have very high P/E ratios. So not only would you want to consider the P/E of the stock itself, but also the companies within the sector too.


FYI, using P/E ratio is an "old" way to pick stocks used for generations since other data on companies were not as easily accessible. Nowadays, selecting stocks is a much more refined process where you might consider earnings, earnings growth, sales, sales growth, insider trading, as well as a number of other attributes.

You might consider picking up How to make money in Stocks in good times and bad by William O'Neill whose CANSLIM method is very well known.

That'll help you get a good basic understanding of what makes a successful stock successful!

Hope that helps!

Answer 2

First thing you probably want to ask yourself is, what good is knowing the PE of a stock? Is there an emphirical formula that calculates what band of PE constitutes overweight or underweight? PE gives you a very crude and somewhat uncomparative figure that attempts to say whether a stock is "expensive" or not. However, the thing is, being "expensive" does not mean that it will drop in price one day. It is like looking at a Bentley as having a high PE and a Honda as having a low PE... does that mean that the Ferrari is about to go on sale and that a Honda will one day cost as much as a Ferrari? Certainly not.

PE ratio, like many other fundamental indicators, are merely a representative of facts and figures that are openly available. It always tell a more meaningful tale when combined with other fundamental and technical analysis methods.

Personally, I retired at 28 years old by trading the stock markets and still trade today for the past 11 years and I have never once included PE in a decision making process. I take an occassional glance at it just for fun but never allow that to govern the decisions that I make nor the actions that I take.

Answer 3

P/E is the Price/Earnings ratio. It is a real simple calculation. Price of the stock (last trade) divided by the earnings per share. It is the focus of most fundamental traders. I think a more usable ratio is the projected P/E. It is the price divided by the projected earnings per share.

Answer 4

Price-Earnings

Answer 5

P/E ratio = market value per shares divided by earnings per share.
it shows how much investors are willing to pay per dollar of earnings