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What is P/E Ratio | by Wall Street Survivor

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Published on May 4, 2012

What is a P/E Ratio?

P/E, or price-to-earnings ratio, is probably the most popular analytical tool provided in the stock quote. At a glimpse, it lets you know how the market values a company in relation to its earnings. A higher P/E ratio tends to mean that a company’s stock price is relatively expensive. A lower P/E ratio means the price is relatively inexpensive.

The key word here is relatively. P/E ratio is useless on its own; it always needs to be compared, either to other companies of similar size, the company's industry, or to past performances of the same company.

What you really need to know about this is that low P/E ratios suggest the stock may be under-valued, but also may have no growth prospects. Always compare a company’s P/E ratio with companies in the same industry and of the same size – A higher P/E ratio compared to the industry suggests either that the stock is overvalued or people expect bigger things from this particular company than all the others in that industry.

Learn more about the P/E ratio with Wall Street Survivor's Getting Started In The Stock Market course pack:http://courses.wallstreetsurvivor.com...

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