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 a simple tool for evaluating a company, but no one ratio can tell the whole story.
InvestingThe P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
InvestingIs a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
InvestingThe estimated P/E of a company is often used to compare current earnings to estimated future earnings.
InvestingWe show you how to compute and analyze the P/E ratio for Netflix.
InvestingThese are some of the over-valued stocks based on P/E and Forward P/E ratios. Will the bubbles burst in 2016?
InvestingInvestors use these four measures to determine a stock's worth. Find out how to use them.
InvestingThese quick-and-dirty ratios will help you find the most undervalued stocks on the market.