Price to Earnings Ratio (P/E Ratio)

Price to Earnings ratio: (Stock Price per share/Earnings per share) OR (StockPrice/EPS)
For 1 share of stock, how much PRICE the market is willing to pay for $1 of its EARNINGS.

For e.g. If a stock has a P/E ratio of 15.74, it implies that the market is willing to pay $15.74 for $1 of its Earnings(e.g. last 12 months). The actual price of a stock can be $33.81 with an EPS(Earnings per share) of 2.15 resulting in a P/E of 15.74 (33.81/2.15).

Low/High/Average- Price to Earnings Ratios. Identification and it's Meaning.

Low P/E => Implies a cheap stock in general.
Can be due to the following reasons: Market reasonably pricing it, Earnings are high or not anticipating higher earnings growth in the future.
e.g. Stock A with a P/E of 14.23

High P/E => Implies an expensive stock in general
Can be due to the following reasons: Market overpricing the stock, Earnings are low or anticipating high earnings growth in the future.
e.g. Stock B with a P/E of 426.99

Average P/E => A P/E of 25 for a S&P company may be considered as an Average P/E.

Traditionally, technology stocks tend to have higher P/E ratios since tech companies can experience higher revenue growth in the future- which of course can turn out to be false. Higher P/E stocks are also more volatile in general. They can go up very high and can crash as well. Low P/E stocks normally rise and fall gradually.

Please note that while P/E is a major criteria while evaluating stocks, some stocks(not all) might have ridiculously low P/E and might not conform to the norms.




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