Investing Fundamentals: The P/E Ratio

Raleigh Investment Consultant, LLC | US Investment Advisor

Before investing in any company it is important to understand its fundamentals. Fundamental analysis is a method of examining the economic and financial factors that determine the financial strength or intrinsic value of a company. One of the commonly used techniques or indicators is the price-to-earnings ratio.

Simply stating the price-to-earnings ratio (P/E ratio) is the ratio of the company's current stock price relative to its earnings-per-share (EPS).

P/E ratios are used by investors to determine the relative value of a company's shares in an apples-to-apples comparison. It can be used to compare a company against its own historical records and determine how the P/E ratio has changed over time. In addition to showing whether a company's stock price is overvalued or undervalued, the P/E can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 Index.

  • A high P/E ratio could mean that a company's stock is over-valued, or that investors are expecting high growth rates in the future.

  • Companies that have no earnings or that are losing money do not have a P/E ratio, indicating that the fundamental analysis of a company may not be good.

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