Fabulous Financial Fact – Price to Earnings Ratio.

Welcome back to Fabulous Financial Facts. I am Ann Zuraw.

When a lot of investors think about the value of a company, they usually start with the Price to Earnings ratio or P/E ratio. The P/E ratio tells you how much you are paying for each dollar relative to company’s profit.

The P/E ratio gives individual stock investors a look at the relationship between the price paid for each stock share and the company’s annual earnings. It also allows you to compare companies in the same business—helping you know if you are getting a good value for what you are paying for. In a lot of instances, the higher the P/E, the more the market is willing to pay for the company’s earnings.

To determine the P/E ratio, all you need to do is take what the current stock is trading at and then divide it by the earnings per share over the last 12 months. Here is an example:Your cake company is currently trading at $20 a share and the earnings over the last 12 months were $1.00 per share. The P/E ratio for the stock would be 20 ($20/$1).

Remember though, the P/E does not tell the whole story.

Keeping it simple. From AZ

About Ann Zuraw

Ann Zuraw, the voice behind "Chicks, Chat and Change", is a Certified Financial Planner (CFP®), Chartered Financial Analyst (CFA®), and Certified Divorce Financial Analyst (CDFA™). If you have comments on this post contact Ann Zuraw

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