Price/Earnings – P/E Ratio

The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn’t tell us the whole story by itself. It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

Things to Remember
•Generally a high P/E ratio means that investors are anticipating higher growth in the future.
•The average market P/E ratio is 20-25 times earnings.
•The P/E ratio can use estimated earnings to get the forward looking P/E ratio.
•Companies that are losing money do not have a P/E ratio.

 
Example: The P/E of a given stock = 17.10
The Share price = $68.40
The Earning = $(68.40/17.10) = $4.00
The Earning per Share = $4.00
 

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