What Is P/E Relating to Stocks?
Price/earnings ratio describes the market price divided by earnings of a stock. The P/E ratio of a stock helps investors decide if the company trades at, more expensively, or more cheaply than the overall stock market.
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Price/Earnings Ratio and Uncertainty
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According to Ben Levisohn of "The Wall Street Journal," the market's average price/earnings ratio has fallen from 14.5 in May 2010 to approximately 12.2 in September 2010. The reason given for this decline is investor uncertainty. While companies trading on the stock market may show improving earnings, investors must purchase shares in order for price/earnings ratios to improve. P/Es may decline because of investor ambivalence.
P/E and Market Enthusiasm
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Conversely, P/Es tend to rise during periods of market enthusiasm. Companies with high P/E ratios compared to the overall market may later report higher than expected earnings reports or other positive news. MarketGauge.com provides investors with P/Es and trading information.
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Calculate P/E Ratio
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Calculate price/earnings ratios yourself by dividing the closing price of any company by the actual previous four earnings quarters. Use price/earnings ratio along with other valuation tools to research investments prior to purchase.
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References
Resources
- "Financial Reporting and Analysis"; Charles H. Gibson; 2009
- "Fundamentals of Financial Management"; Eugene F. Brigham, Joel F. Houston; 2007
- "Stocks for the Long Run"; Jeremy J. Siegel; 2007
- "How to Read a Financial Report"; John A. Tracy, CPA; 2009
- "Valuation"; Tim Koller, Marc Goedhart, David Wessels; 2010
- Photo Credit rolled newspaper 1 image by Piotr Bizior from Fotolia.com
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Comments
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An understanding of P/E ratio is very important for normal investors before taking any investment decisions. Thanks for putting up this article which explains the significance of P/E ratio very clearly.
