What is P/E Ratio?

 

What is PE Ratio?

1) What is P/E Ratio?

P/E Ratio or Price to Earnings Ratio means, ratio of the current price of a company’s share in relation to its earnings per share (EPS). The P/E ratio is also known as the price multiple or the earnings multiple. It is a popular ratio that gives investors a better sense of the value of the company. P/E Ratio shows how much amount you want to pay for current or future earning of the company.

 

2) Price Earning Ratio Formula:

 P/E Ratio = Stock Price Per Share/ Earnings Per Share

3) What is a good P/E ratio?

Lower P/E ratio is better. for Example there are two companies A and B, the P/E ratio of company A is 20 and the P/E ratio of company B is 10.

In this case as per P/E ratio concept the company B is better because company B 

 

4) Is a high P/E Ratio is good?

Stock with a high P/E ratio is not necessarily a better investment than one with a lower P/E ratio, as a high P/E ratio can indicate that the stock is being overvalued. 

 

5) What is P/E ratio example?

P/E Ratio is calculated by dividing the market price of a share by the earnings per share.

For Example: Market price of company A Ltd. is Rs. 100 and the earnings per share is Rs. 20 then the P/E ratio will be 5 times i.e. Rs. 100/ Rs.20 

 

6) What is a bad P/E ratio?

Higher P/E Ratio is bad. A high P/E typically means a stock's price is high relative to earnings. A low P/E indicates a stock's price is low compared to earnings. A consistently negative P/E ratio run the risk of bankruptcy.

 

7) How do you know if a stock is overvalued or undervalued?

The higher the P/E ratio, the chances of overvalued a stock may be high.

The lower the P/E ratio, the chances of undervalued a stock may be low.

 

8) What is Negative P/E ratio?

A negative P/E ratio means that a stock has negative earnings. If earnings per share (EPS) is lower than zero, then the stock have a negative P/E ratio.

 

9) What is P/E and P/B?

P/E ratio is a measure of the valuation of a company's stock. Price in the numerator and earnings in the denominator. The price-to-book (P/B) ratio compares the price of the stock with its book value (accounting value)

 

10) What if PE ratio is less than 10?

If P/E ratio of a company is 10 time that means investor has to pay Rs. 100 to earn Rs. 10 hence lower P/E ratio is better. If P/E ratio is less than 10 times that means investor has to pay less than 10 times of earning of the company for purchasing the company's share for example: if a company has a P/E ratio is 5 times that means investor has to pay Rs. 100 to earn Rs. 20.