Back to the Basics: Price-Earnings Ratio (P/E Ratio)

Back to the Basics: Price-Earnings Ratio (P/E Ratio)

Why You Should Take a Look at Multiple PE Ratios When Evaluating a Stock

PE Ratio Considered by many investors as a “quick” way to value a stock, the Price-Earnings Ratio can be a key valuation metric to making informed stock investment decisions. And, the price to earnings ratio [P/E Ratio] is one metric that has more to it than meets the eye.

What is a Price-Earnings Ratio (P/E Ratio)?

Plain and simple, the P/E Ratio for a stock is calculated from its current market price per share [P] in relation to the stock’s earnings per share [EPS]. Below is a look at the PE Ratio formula.


Generally, the market looks at high P/E Ratios as growth stocks and low P/E Ratios as value oriented stocks. The P/E Ratio is basically showing what the shares are worth compared to the company’s past earnings.

While a stock’s current market price is universally available on sites like Yahoo Finance you may come across some inconsistencies with the EPS. Why is that?

Well, “…investors routinely debate if the price of a company is the current reflection of its value, [and] everybody agrees that the price represents what an investor will pay for the stock right now.” [1] Price is what we see on the ticker—but the EPS is not as consistent.

So, if we really want to understand a stock’s P/E Ratio, then we should at least know…

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Posted by:

Mike Casson
Executive Editor
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