Price earnings Ratio for beginners

To fundamentally understand Price Earnings Ratio, you must understand Earnings Per Share (First read PES article). The formula for the Price Earnings Ratio, more commonly referred to as P/E ratio is the current price of the stock divided by its Earnings Per Share. It is more intuitive to think of it as a company's profit related to its current price. Therefore, using P/E you can tell if a company is overvalued or undervalued in its sector based on its P/E numbers. For example, If you are interested in the Steel sector and are confused whether to purchase Company A or Company B, you can compare their P/E numbers. The lower the P/E, the better the buy. This is due to the company being undervalued due to its stock price being lower in reference to its profit per share implying it is more probable to grow. Think about it for a while. You'll get it. A more advanced way to use P/E for investing would be to analyze a certain company's P/E trend over a period of time. Many times, companies can fluctuate from undervalued to overvalued so checking their P/E can be an indicator for when to buy the stock. These are the basics of P/E which is generally seen as an overall indicator of stocks potential for growth.  

 

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