What is the significance of P/E ratio???

Question

I mean what is better for an investor---- P/E < 1 or P/E > 1??
and what is better for the company??

Answer 1

The P/E (price to earnings) ratio of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is used to measure how cheap or expensive its share price is. The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. It is a valuation ratio included in other financial ratios.

P/E RATIO = Price per Share divided by Earnings per Share

The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The EPS used can also be the "diluted EPS" or the "comprehensive EPS"

For example, if stock A is trading at $24 and the Earnings per share for the most recent 12 month period is $3, then the P/E ratio is 24/3=8. Stock A said to have a P/E of 8 (or a multiple of 8). Put another way, you are paying $8 for every one dollar of earnings.

It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze the market's valuation of a company's shares relative to the wealth the company is actually creating.

One reason to calculate P/Es is for investors to compare the value of stocks, one stock with another. If one stock has a P/E twice that of another stock, it is probably a less attractive investment. But comparisons between industries, between countries, and between time periods may be dangerous. To have faith in a comparison of P/E ratios, one should compare comparable stocks.

Generally speaking, a stock with a lower P/E ratio is more attractive to the investor, while a stock that is selling at many times it's earnings is better for the company.

Answer 2

Price to earnings ratio is a means of comparing publicly traded companies based on their operational performance. The higher the ratio, the better the company looks.

The two most significant things that affect the ratio are probably the company's earnings from year to year and the number of shares they have sold to the public. (A company can have great earnings but their ratio can be low because they've sold so much stock that the value has become watered down.)

Another thing that affects some companies is an offering of stock options to employees. Companies are required to report these offerings as contingencies, and the result is a "diluted" earnings per share on the income statement and a different P/E ratio.

Answer 3

The price/earnings ratio is the cost of a share vs the earnings per share. In general, the higher the P/E, the more speculative the company is. In other words you are betting future earnings are going to be higher. Established companies have lower ones. For example Red Hat is a nosebleed at 68. while Exxon has one of 11.

High P/E's make the company more volitile towards news. You can win a fortune or lose your shirt on them much more rapidly. Conservative investors choose companies with low P/E's, growth investors pick the highs.

-Dio

Answer 4

Also known as the "Price to Earnings Ratio", this number gives you an idea of how much you are paying for a stock per $1 of earnings. For example, if a stock sells for $10 a share and it is expected to earn $1 per share this year, it is selling at aP/E ratio of 10. Now, how do we know if we are paying too much or not enough? The best idea is to look at other comparable companies in the sector that the company competes.

Answer 5

The price earnings ratio is the price of the stock divided by the earnings of the company. Where the number is most helpful is in comparison to other similar sized companies in the same industry. That allows you to evaluate how the company is performing as well as speculate on whether the price will continue to rise or fall.

Answer 6

in the invertment point of view ACC company is the best