P/E Ratio: Conclusion
AAA
  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: 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: 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
RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  4. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  5. Total Debt-to-Capitalization Ratio

    An indicator that measures the total amount of debt in a company’s ...
  6. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
  1. How should a company budget for capital expenditures?

    Learn the difference between capital expenditures and operational expenses, and discover the importance of budgeting for ...
  2. What happens to my annuity after I die?

    Understand the different types of annuity payment plans and what payments or additional benefits are payable to your beneficiaries ...
  3. What is the first day of the quarter?

    Learn when the first day of the quarter is. Explore why investors and analysts prefer to compare results year-over-year due ...
  4. What is the difference between a quarter and a year in finance?

    Examine the difference between a fiscal quarter and a fiscal year. Learn why investors examine both quarterly and annual ...

You May Also Like

Related Tutorials
  1. Investing Basics

    Industry Handbook

  2. Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  3. Fundamental Analysis

    Discounted Cash Flow Analysis

  4. Economics

    American Depositary Receipt Basics

  5. Fundamental Analysis

    Ratio Analysis Tutorial

Trading Center