P/E Ratio- One of the Major indicators for a cheap stock!

Are stock A($441.81) or stock B($879.73) more expensive than stock C($40.17) or stock D($46.24) because they cost more? Not really!

Take a look at the table below. Stock A with a P/E ratio of 10.55 or stock B with a P/E ratio of 26.19 implies that those stocks are more reasonably priced or cheaper than stock C which has a P/E ratio of 60.0 or stock D with a P/E ratio of 68.80. This is because for each $1 of the company earnings you are paying less to own the stock of stock A or stock B than for stock C or stock D.

Stock Price P/E
Stock A $441.81 10.55
Stock B $879.73 26.19
Stock C $46.24 60.00
Stock D $40.17 68.80

Here's the same information presented differently for better insight:
You are paying $10.55 FOR each $1 of profit that Stock A made when you buy 1 share at $441.81
You are paying $26.19 FOR each $1 of profit that Stock B made when you buy 1 share at $879.73
You are paying $60.00 FOR each $1 of profit that Stock C made when you buy 1 share at $46.24
You are paying $68.80 FOR each $1 of profit that Stock D made when you buy 1 share at $40.17

So why is stock A cheap? Since you're paying less for it for each dollar of profit the company made compared to all the other 3 stocks.


In general, you can also say that since stock A is a relatively cheaper stock it won't have high price swings compared to the other 3 stocks as well.

Furthermore, while selecting stocks, apart from looking at the P/E ratio, you should also consider how fast(% growth) the stock price/revenues might increase. A stock increasing from $400 to $800 will double your investment whereas a stock increasing from $20 to $60 will triple it.

***Stock A (priced at $441.81) is actually more cheaper than stock D(priced at $40.17) based on its P/E ratio!***




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