What is the P/E Ratio? A Beginner’s Guide
How to use the P/E ratio when evaluating stocks, how to calculate it, and what to be cautious about
👋🏼,
Hope you’re having a good week so far!
Here’s something that puzzled me when I first started investing:
Why do some companies have a share price that's just 5 times their earnings, while others are worth 50 times or more?
It’s not always obvious at first. Is it because one company is a bargain? Or is another just overhyped?
The answer lies in the price-to-earnings (P/E) ratio, which reflects how the market values a company’s current earnings and future potential.
The price-to-earnings (P/E) ratio tells a story - about a company’s growth potential, risk, and how the market views its future. But understanding why some stocks have low P/E ratios while others seem sky-high takes a little unpacking.
Today, I’ll break down:
What the P/E ratio really means
How the P/E ratio is calculated (with an example)
📹 Explainer
Low P/E and High P/E case studies 🤓
Is P/E ratio a good indicator for deciding which stocks to invest in?
Let’s jump in!