Fundamentals Analysis : PE Ratio, Price Per Earnings

Hi,

This first in a series of descriptions of fundamental analysis will look at the PE ratio.  The PE ratio, or Price Per Earnings Ratio, is a measure of how expensive a particular stock is.  It is a value ratio.

The PE ratio = Stock Price / Earnings Per Share

To get an idea of how good the PE ratio is, you would have to compare it to other similar companies to see if it is good or bad.

The value of PE is the amount the investor is willing to pay for $1 of earnings.  If the value of the PE ratio is high, it may be that the stock is overpriced, or it may be that the company has a high expected future growth, and investors are getting in early.  By itself and in isolation, the ratio has little meaning, but put in context it can be very powerful is deciding how profitable an investment might be.