The P/E ratio: you should know how it works

The P/E ratio: you should know how it works

if you are interested in two stocks in the same industry which one do you buy the price to earnings ratio or the p/e ratio is one way to help you decide

 the p/e ratio is the price an investor pays for one dollar of the company’s earnings to calculate it divide the current price per share by its annual earnings per share if stock A has a p/e ratio of 10 and stock B has a p/e ratio of 17 then investors are paying more for one dollar of earnings for stock B because its p/e ratio is 17 .

in other words stock A is cheaper relative to stock B all things being equal investors should choose stock a because it has greater earning potential p/e ratios are most useful when they are used to compare stocks in the same industry with a broader market sector or a stock’s own historical p/e growth investors expecting higher earnings growth for a stock will favour a high p/e ratio but a higher p/e may mean more risk .

on the other hand value, investors tend to look for stocks that may have a lower p/e ratio which they consider undervalued by the market the p/e ratio is just one factor to consider when researching a particular stock.