Fabulous Financial Fact – Price to Earnings Ratio

Fabulous Financial Fact – Price to Earnings Ratio

When a lot of investors think about the value of a company, they usually start with the Price to Earnings ratio or P/E ratio. The P/E ratio tells you how much you are paying for each dollar relative to the company’s profit.

The P/E ratio gives individual stock investors a look at the relationship between the price paid for each stock share and the company’s annual earnings. It also allows you to compare companies in the same business—helping you know if you are getting a good value for what you are paying for. In a lot of instances, the higher the P/E, the more the market is willing to pay for the company’s earnings.

To determine the P/E ratio, all you need to do is take what the current stock is trading at and then divide it by the earnings per share over the last 12 months. Here is an example: Your cake company is currently trading at $20 a share and the earnings over the last 12 months were $1.00 per share. The P/E ratio for the stock would be 20 ($20/$1).

Remember though, the P/E does not tell the whole story.


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