28 April 2017

When and How to use P/E ratio (Price-Earning ratio)

Which stock and when to invest? A key question every person about to invest has in their mind. The answer to these issues is Price-Earning (PE) ratio and popular in the investment community. However, it is not entirely reliable.

PE ratio is one widely used tool for stock selection. One key thing you need to remember is this ratio is only useful in comparing companies in the same industry. A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

Calculation

The PE is calculated by dividing the market price per share by the earnings per share (EPS).

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As mentioned above higher PE ratio refers that the stock is expensive which means it is possible that share is overpriced and Lower price ratio, on the other hand, may refer to the poor performance of the company. That is the reason why I said PE is completely reliable. You have to look at the background of the company, before investing.

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