What have we learned about the P/E ratio? Although the P/E often doesn't tell us much, it can be useful to compare the P/E of one company to another in the same industry, to the market in general, or to the company's own historical P/E ratios.
Some points to remember:
- The P/E ratio is the current stock price of a company divided by its earnings per share (EPS).
- Variations exist using trailing EPS, forward EPS, or an average of the two.
- Historically, the average P/E ratio in the market has been around 15-25.
- Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings.
- A better interpretation of the P/E ratio is to see it as a reflection of the market's optimism concerning a firm's growth prospects.
- The P/E ratio is a much better indicator of a stock's value than the market price alone.
- In general, it's difficult to say whether a particular P/E is high or low without taking into account growth rates and the industry.
- Changes in accounting rules as well as differing EPS calculations can make analysis difficult.
- P/E ratios are generally lower during times of high inflation.
- There are many explanations as to why a company has a low P/E.
- Don't base any buy or sell decision on the multiple alone.
InvestingThe P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
InvestingThe P/E ratio is a simple tool for evaluating a company, but no one ratio can tell the whole story.
InvestingThe most common types of price to earnings ratios are forward P/E and trailing P/E. Find out how they differ and the advantages and drawbacks of each.
InvestingThe estimated P/E of a company is often used to compare current earnings to estimated future earnings.
InvestingIf Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
InvestingRecently, Apple's P/E multiple has come down to levels equal to the S&P 500. What does the future hold for the tech giant's P/E ratio?
InvestingDiscover why the price/earnings (P/E) ratio is important in determining the relative value of a stock and find out which S&P 500 stocks have the lowest P/E ratios.
InvestingWhile the price-to-earnings ratio is commonly used for assessing stock prices, the price/earnings-to-growth ratio offers forecasting advantages that investors need to know.
InvestingWe show you how to compute and analyze the P/E ratio for Netflix.