Price to Earning (P/E) ratio: Importance and Meaning

April 5, 2008

Price to Earning (P/E) ratio = price (per share) ÷ earnings (per share).

Low P/E ratio indicates that the stock is undervalued (or the company is failing).

Consider the example, if a company’s share price is 200 Rs and its earning per share is Rs 20 in last 12 month. Its P/E ratio will be 200 ÷ 20 = 10.

The P/E ratio answers the question “Am I paying too much for the company’s earnings?”

Some points to remember:

1. Don’t invest in those company’s share which is having much higher value of Price to Earning (P/E) ratio compared to other stocks in same category because it indicates that current price of the share is overvalued, price of that stock have more chances to fall in future.

2. Don’t invest in those company’s share with no price to earning value. No P/E value means that the company is in loss.

Comments (3)

  1. Manish Kakadiya says:

    I see some scripts which have negative PE ratio? pls explain in detail about this.

  2. Michael says:

    Very good article.

    In my opinion, it is all a matter of market timing. It does not matter if it is gold, oil, or Microsoft, if you have access to good market timing signals, they will help you get in and out at a profit.

    No guarantees in this business, but if they are right most of the time, you can still make $s.

    There are may web sites providing them out there (search Google). Just find one that works and use it! Check out as an example.

    Its Dow Jones timing signals are up 44.7% as of 6/24/09 while the Dow is up just 26% off its March lows.

    Following a market timing system works!

  3. Allen Taylor says:

    Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

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