P/E Ratio: It's Not A Crystal Ball
  1. P/E Ratio: Introduction
  2. P/E Ratio: What Is It?
  3. P/E Ratio: Using The P/E Ratio
  4. P/E Ratio: Problems With The P/E
  5. P/E Ratio: It's Not A Crystal Ball
  6. P/E Ratio: Conclusion

P/E Ratio: It's Not A Crystal Ball

What goes up ... well, sometimes it stays up for an awfully long time.

A common mistake among beginning investors is the short selling of stocks because they have a high P/E ratio. If you aren't familiar with short selling, it's an investing technique by which an investor can make money when a shorted security falls in value. (For more on this, check out the Short Selling tutorial.)

First of all, we believe that novice investors shouldn't be shorting. Secondly, you can get into a lot of trouble by valuing stocks using only simple indicators such as the P/E ratio. Although a high P/E ratio could mean that a stock is overvalued, there is no guarantee that it will come back down anytime soon. On the flip side, even if a stock is undervalued, it could take years for the market to value it in the proper way.

Security analysis requires a great deal more than understanding a few ratios. While the P/E is one part of the puzzle, it's definitely not a crystal ball.

P/E Ratio: Conclusion

  1. P/E Ratio: Introduction
  2. P/E Ratio: What Is It?
  3. P/E Ratio: Using The P/E Ratio
  4. P/E Ratio: Problems With The P/E
  5. P/E Ratio: It's Not A Crystal Ball
  6. P/E Ratio: Conclusion
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  2. Profit and Loss Statement (P&L)

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  3. Liquidity

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  4. Profit Margin

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  5. Quarter - Q1, Q2, Q3, Q4

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  6. Debt Ratio

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  1. How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...

    The PEG ratio, or price/earnings to growth ratio, is a good tool for determining stock valuation when you need to make a ... Read Full Answer >>
  2. Is book value a better metric for company worth than the PE ratio?

    Book value can be a better metric than the P/E, or price to earnings, ratio in certain circumstances, but a company’s true ... Read Full Answer >>
  3. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  4. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  5. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  6. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>

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