I’ve come across the term Price to Earnings (P/E) ratio a few times, and I’m curious to understand it better. I know it’s a metric used to evaluate stock prices, but I’m not entirely clear on how it works and how to interpret it.
A price-to-earnings ratio (P/E ratio) is a valuation metric for stocks that measures a company's share price in terms of its earnings per share or EPS. It states how much investors are ready to pay for each ruce of the earnings of the company, and it is Price per Share / Earnings per Share (EPS).
Price to earnings (P/E) ratio is the easiest method which can be used to observe whether a share is high or low in terms of its earnings. The percentage is calculated by dividing the price of the stock by its earnings per share (EPS). A high P/E can indicate that the stock is overpriced or investors are anticipating increase, whereas a low P/E can be an indication that the company is underpriced or it is in distress. It can be best applied in comparing companies operating in the same industry.
The simplest way to determine if a share is high or low in terms of earnings is to look at the price to earnings (P/E) ratio. The price of the stock is divided by its earnings per share (EPS) to determine the percentage. While a low P/E may suggest that the company is undervalued or experiencing difficulties, a high P/E may suggest that the stock is expensive or that investors are expecting an increase. It works best when comparing businesses that are in the same sector.
