
P/E Ratio: Conclusion
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 1525.
 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.

RELATED TERMS

IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Profit and Loss Statement (P&L)
A financial statement that summarizes the revenues, costs and ... 
Percentage Change
Percentage change is a simple mathematical concept that represents ... 
Markdown
The difference between the highest current bid price among dealers ... 
Catalyst
A catalyst in equity markets is a revelation or event that propels ... 
Investing
The act of committing money or capital to an endeavor with the ...
RELATED FAQS

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 >> 
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 >> 
What is finance?
"Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >> 
What is the 'Rule of 72'?
The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >> 
What is the formula for calculating EBITDA?
When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >> 
How do I calculate the P/E ratio of a company?
The priceearnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>