PE Ratio

A P/E ratio is a term that is important to consider when analyzing any stock. Any investor should understand it and consider it when looking at a stock, but try not to make it your only metric you rely on. What is the PE ratio?

The PE ratio is is a way to measure how a stock is being valued. P/E is the Price per share divided by the earnings per share. If a company was worth $100 and it earns $5 for every share, the PE ratio would be 20. A high PE means that a stock is valued high, and investors expect future growth. A lower PE indicates that a stock could be undervalued. When you have these values, you should compare them to the industry average, the previous PE of a stock, and the possibility for growth. Niether an extreme high or low is good for a PE ratio either, as they can mean a company being overly hyped or trouble, respectively. If there's one thing to take away, it's that a good PE isn't about being a low or high one, but being reasonable for the company and its future potential.