A Look Into Price To Earnings Ratio - P/e
If you are thinking of investing in stocks and you want to know how to do it effectively, you need to start looking at the price to earnings ratio. This sounds more confusing than it is; once you have worked through an example you will understand how useful it can be to perform this calculation.
Put simply the price to earnings ratio is what you get when you take the cost of the stock and divide it by how much it has earned. To get the latter figure you need to work out what the stock's earnings per share are (EPS). So for example if the stock costs $50 per share and you work out that its EPS is 10, the price to earnings ratio would be 5. Another example has a stock costing $20 a share with an EPS of 5, which gives it a price to earnings ratio of 4.
That's all very well, but what do you do with these figures?
In short they give you some valuable information on how a company's stock is viewed by those who are already investing in it. The higher the figure is the more promising it could be to invest in. I say ‘could be' because there is no definitive answer to this. A good figure can point to a good stock; however it can also point to a stock that is now overpriced. The same applies in the opposite way to stocks which are calculated to be low in cost. They can point to poor performances, but equally they can be promising if they are on the verge of improving.
This is why you should never act solely on what you learn from the price to earnings ratio. Instead you should use it as one part of your overall tactics to find good stocks to invest in. By looking for news reports, press releases and other information you can try to find reasons why a company's stocks could be overpriced or underpriced. This will help you to decide which companies to invest in and which ones to leave well alone.
It is worth calculating the price to earnings ratio every now and then as well. Since it will change over time as different events take hold, you can see that the results will change as well – and so could your investment decisions.
Put simply the price to earnings ratio is what you get when you take the cost of the stock and divide it by how much it has earned. To get the latter figure you need to work out what the stock's earnings per share are (EPS). So for example if the stock costs $50 per share and you work out that its EPS is 10, the price to earnings ratio would be 5. Another example has a stock costing $20 a share with an EPS of 5, which gives it a price to earnings ratio of 4.
That's all very well, but what do you do with these figures?
In short they give you some valuable information on how a company's stock is viewed by those who are already investing in it. The higher the figure is the more promising it could be to invest in. I say ‘could be' because there is no definitive answer to this. A good figure can point to a good stock; however it can also point to a stock that is now overpriced. The same applies in the opposite way to stocks which are calculated to be low in cost. They can point to poor performances, but equally they can be promising if they are on the verge of improving.
This is why you should never act solely on what you learn from the price to earnings ratio. Instead you should use it as one part of your overall tactics to find good stocks to invest in. By looking for news reports, press releases and other information you can try to find reasons why a company's stocks could be overpriced or underpriced. This will help you to decide which companies to invest in and which ones to leave well alone.
It is worth calculating the price to earnings ratio every now and then as well. Since it will change over time as different events take hold, you can see that the results will change as well – and so could your investment decisions.
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