P/E Ratio: Conclusion
  1. P/E Ratio: An In-Depth Guide
  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: 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 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.

  1. P/E Ratio: An In-Depth Guide
  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
  1. Percentage Change

    Percentage change is a simple mathematical concept that represents ...
  2. Markdown

    The difference between the highest current bid price among dealers ...
  3. Catalyst

    A catalyst in equity markets is a revelation or event that propels ...
  4. Investing

    The act of committing money or capital to an endeavor with the ...
  5. Qualitative Analysis

    Securities analysis that uses subjective judgment based on nonquantifiable ...
  6. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  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. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  4. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  5. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  6. 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 >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center