P/E ratios, sometimes called price or earnings multiples, measure a company’s value by comparing the share price against its earnings per share (EPS). Investors can use P/E ratios as one measure of a stock’s relative value.
The P/E, or price-to-earnings, ratio measures how much investors are willing to pay per $1 of company earnings. For instance, if a company trades at 15x earnings, then investors will pay $15 per share for every $1 the company earns.
The “P” in P/E ratio stands for the current market price of a single share of stock. “E” stands for EPS, or the company’s 12-month earnings divided by the average number of outstanding shares.
To calculate a company’s P/E ratio, simply divide P (share price) by E (earnings per share).
For instance, say that Company X trades at $100 and its current EPS is $10. The P/E ratio would be 10x ($100/$10), signifying that investors will pay $10 for every $1 Company X earns.
You can calculate several types of P/E ratios, including:
Another variation is the PEG (price-to-earnings to growth) ratio. The PEG ratio measures a company’s value based on current and future expected earnings. However, its major downside is that it relies on future growth that may never materialize.
P/E ratios are useful because they offer a standardized method of comparing stocks across prices and earnings levels. Investors and analysts often use P/E ratios to determine a stock’s relative valuation and inform whether it’s over- or under-valued.
For example, companies with high P/E ratios have high share prices compared to earnings. These companies may be overvalued, or simply growth stocks on their way up. By contrast, companies with low P/E ratios have low share prices compared to earnings. These may be undervalued value stocks, or simply poorly-performing firms.
One important note for using P/E ratios is that they’re most accurate when comparing companies in the same industry. Each industry has a “normal” P/E range that may differ greatly from another’s.
For instance, if you compared AT&T and Exxon’s P/E ratios, you might think one is the clear “winner.” But the reality may simply be that they’re different, not better.
P/E ratios offer a standardized method for comparing stocks or funds with different prices, EPS levels and market caps. But it’s not a perfect measurement – and you shouldn’t rely on a single ratio to inform your trading decisions.
If you’re not interested in doing the math and comparing stocks by hand (trust us, we don’t blame you), Q.ai offers a simple solution. Our artificial intelligence crunches the numbers for you –all you have to do is sign up, commit capital and let us invest for you.
Learn everything about Q.ai Investment Kits and how they help build wealth
Types of Stocks
There are various types of stocks in which to invest. Not all of them offer your portfolio the same.
What Are Stock Futures?
Stock futures are derivative financial contracts that require the buyer to buy and the seller to sell at a set date and price.
What Are Semiconductors?
In the scientific world, semiconductors are materials that conduct current – partly (hence the name). They play a major role in tech for investors.
In just 2 minutes, iQ will help you become the expert your friends go to for investing advice.
Fintech Breakthrough Award
Best Retail Investment Company
AI Breakthrough Award
Best Deep Learning Platform
AIBenzinga Global Fintech
Product Hunt’s Golden Kitty
Semi-Finalist – Fintech
#1 Product of the Day
#2 Product of the Week
Copyright © 2023 Q.AI LLC. All rights reserved