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Price to Earnings Ratio
Definition
The price to earnings ratio is calculated by dividing the current share price of a stock by its basic earnings per share. The earnings per share utilized may either be trailing P/E (the prior twelve months) or forward P/E (an analyst's forecasted twelve months ahead earnings).
Using the term Price to Earnings Ratio :
The price to earnings (P/E) ratio is often referred to as "the multiple" and is the most commonly used benchmark for comparing companies with each other. It is most appropriate to compare multiples of companies only within the same industry. Quite simply, the P/E ratio tells an investor how much they are paying for a given amount of earnings and it allows for comparison amongst companies in a given industry.
Pay Special Attention To :
A high price to earnings ratio (perhaps above 20 or 25) is often associated with "high growth stocks" meaning that the market has high expectations for that company to grow its earnings very quickly. Be careful though, such companies are higher risk. This is because if they falter and dissapoint the market with below average earnings, even for one quarter, the stock is often hammered down quickly. Lower P/E stocks are normally found in slower growth industry with more stability of earnings and predictible dividends. High P/E stocks rarely, if ever, pay a dividend.
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Related terms
multiple , EBITDA
'Price to Earnings Ratio' appears in the definitions of these other terms:
EBITDA
