Understanding a P/E Ratio (Price Earnings Ratio)What is a P/E Ratio? The 'P' stands for Price and the 'E' for Earnings. The two most important things in investment - the price you pay and the earnings you own. P/E ratio = share price divided by Earnings per share (EPS) At it's most straightforward ... the p/e ratio is a notional number. It is used to provide a notional number of years (in current profit terms) that it will take to 'earn' the current share price. In other words, if a firm has a p/e of 10, you could estimate that the company needs to earn the same profits for 10 years to 'break even' on the share price.
A low p/e ratio therefore, suggests the opposite. Opinions of the market suggest that growth may be 'low' or 'unreliable' or perhaps the expectation is that the company is soon to disappoint. Companies will often be rated against their peers in a specific sector. This is a useful way to view the market's opinion of a company against other similar enterprises. A business may have a p/e ratio that is out of line with the average for the sector. This may suggest that the company is expected to grow more quickly or slowly than the sector average. All these little factors may have an important bearing upon your investment and the returns achieved so pay attention!! To read more about risk analysis techniques and measurements, please also visit:
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