eternal student
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P/E ratio is a measure of a company's value (stock price) relative to its (expected or forward) earnings. Investors compare a firm's P/E ratio with respect to its peers in the industry. A high P/E ratio implies the stock is richly valued. This could be due to the market's expectation of higher earnings and/or higher earnings growth rate for the company.
If you are a professional investor you will do your own analysis and forecasts and determine whether the company is an attractive buy or not, given its current valuation. You will consider buying a firm with a low P/E ratio relative to its peers.
On the other hand, based on your analysis, say you determine that the firm is over valued. In this case, a high P/E ratio may tell you that the market being more optimistic about the company's future than you are. You believe that the market will eventually correct itself. In that case, you will consider selling (or selling short) a stock with a high P/E ratio relative to its peers.
As illustrated above, P/E ratio is a "fundamental" measure used by long-term investors. Traders and other short term investors do not typically use these factors. They base their trades on momentum and other "technical" factors. |
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stfn314
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The price / earnings (P/E) ratio is commonly used to assess the owners' appraisal of the share value. The P/E ratio measures the amount that investors are willing to pay for each dollar of a firm's earnings. The level of the price/earnings ratio indicates the degree of confidence that investors have in the firm's future performance. The higher the P/E ratio, the greater is investor confidence.
P/E ratio = market price per share of common stock / earnings per share
NOTE: The P/E ratio is most informative when applied in cross-sectional analysis using an industry average P/E ratio of a benchmark firm. |
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Ted
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Low P/E means that the stock is cheap. If it returns to a normal P/E ratio there is a potential for profit. The opposite is true for high P/E.
The low P/E may not be such a great deal because the stock may be low for a reason, like the company is screwed up. The other danger is that the P/E is wrong. Some places will continue to publish a P/E ratio based on last year's results, even though the company is in trouble and the earning this year will be down.
I don't look at P/E at all in my trading. |
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Scott L
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It depends on your investing philosophy. neither is a great indicator that a stock is good. A low P/E might mean the company is bad or in trouble or is just ignored. Or it might be a great value. A High P/E might mean it's growing like gangbusters or absurdly overpriced. Some industries have naturally lower P/E's than others so you need to compare to other in it class. generally something in the 15-20 times earning range is normal. 10 is a value stock. Much above 20 indicates a high price for what you are getting but a lot of higher P?E stocks are that way because the are "hot" at the moment. If you are looking for risky stocks with potentially higher gains go higher P/E (but not super high cause then you already missed the boat most likely). If you want long term value and lower risk look at lower P/E. But again, it's only one criteria of many when evaluating a stock. My personal best bet is a stock with rising earnings and if the P/E is relatively low so much the better. |
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JohnGalt
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It depends on other issues.
Am I buying or selling?
Is it a tech stock or a commodity supplier?
What does high and low mean? |
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Sweeeede
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To make a long answer short, a lower P/E ratio is better. It means the earnings are high compared to the share price which shows it is not overvalued. However when comparing stocks, it is good to look at the P/E ratio for the industry. A "good" P/E ratio for one industry might be bad in another. |
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bizzbagg
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buy the company's assets not the earnings. case in point i bought Dynacq Healthcare (DYII) for $3.03 a share or $47.15 million market cap.
It has $45.10 million in cash alone. a cash flow of $27.71 million.shareholder equity of $66,927 million. Has you see I protected my money with the company's money. |
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Robert M
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High or low really does not matter. You need to compare the P/E ratio to the company's earnings growth rate. This is PEG.
When you buy stock you are buying future earnings. Focus on companies with a PEG< 1
P/E tells you nothing. |
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