I keep hearing about PE on TV. But what is PE?
PE is a comparison between a company’s stock price and its earning per share. It is also known as PE Ratio, price multiple or earnings multiple.
How is PE calculated?
It’s calculated by dividing the current stock price of a company by the EPS of the company.
For example, if the stock price of a company is $100, and its EPS is $5, the PE is $100 divided by $5, which is 20.
What if a company if not making money? What would be the PE then?
There is no PE for companies that are making a loss.
Is the latest EPS of a company considered for PE ratio?
Yes, usually the PE is calculated using the EPS from the latest result declared by a company. This is also called trailing PE.
However, the PE ratio can also be calculated using the projected or forecast EPS of the company. PE ratio calculated this way is called forward PE.
Why is PE ratio important to me as an investor?
PE is important, because it indicates the price you need to pay for each dollar of the company’s earnings. Based on how it compares with the PE of similar companies, you can tell whether a stock is over-priced or under-priced.
So, what is better – a high PE or a low PE?
There is no general rule, and interpreting PE is a complex task. Also, the PE ratio cannot be used alone by itself – it should be used along with other factors. But that’s a topic for another time…
Podcast: What is a PE Ratio (P/E Ratio)
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
All you need to know about the PE ratio: What is P/E Ratio or Price to Earnings Ratio (also called Earnings Multiple or Price Multiple), How is PE calculated, What if a company if not making money (making a loss) – what is the PE then, Is the latest EPS of a company considered for PE ratio, Why is PE ratio important to you as an investor, What is better – a high PE or a low PE, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/what-is-a-pe-ratio-p-e-ratio/