Price to Earnings Ratio – P/E

A P/E ratio, or Price to Earnings Ratio, is a simple financial metric used to examine the value of a company. It tells you how much the market is willing to pay for $1 of a company’s earnings.

The Math

The price of a company’s stock is divided by the earnings per share of that company.

For Instance

If a company’s stock is trading at $100 and its earnings per share are $4, this means investors are apparently willing to pay $25 for every $1 of the company’s annual earnings to own this stock, resulting in a price to earnings ratio of 25.

As a Helpful Metric

A high price to earnings ratio may indicate investors expect higher growth in the future. Alternately, the stock may be overvalued.

A low price to earning ratio may indicate the stock is undervalued and a good buying opportunity. Alternately, perhaps the the company is facing challenges and the investment is less compelling.

There are many factors that lead to good investment outcomes. This is but one way to evaluate a potential opportunity. Consult with your advisor, which should be me.

-Zac