| | | | price-earnings ratio = current market price / earnings per share
This is perhaps the most commonly used ratio to compare company's within the same sector as it is quoted daily in the financial press not only for individual stocks but also for sectors and indices.
It shows whether stocks are expensive or cheap relative to each other and how many years of current earnings investors are prepared to pay for. Also how optimistic the market is about future trading prospects.
A relatively high price-earnings ratio will indicate a stock is expensive in relation to its peers. This might be justified because the company is seen as a leader within its sector and has above average prospects.
If based on projected price-earnings, the ratio will contain an element of sentiment by the analyst. Therefore there might be bargains to be had by looking at companies with a low ratio, if you believe they are out of favour with the market rather than having fundamental problems. | | | |
|
