What's a P/E Ratio?

Have you ever wondered what investors use as their go to metric to determine if a stock is overpriced or underpriced? That's the P/E ratio.

What does P/E stand for?

You may have seen in the cover picture, but if you didn't, P/e stands for price/earnings. Price represents the current market value of one share of a stock, and earnings represents the company's earnings per share (EPS), or their total earnings divided by the number of outstanding shares.

Think of it like this: How much are you paying for every dollar that the company earns?

Example Scenario

Stock price: $200

EPS: $5

200/5=40, meaning that investors are willing to pay $40 for every dollar the company earns.

Usually, high P/E ratios (40+) signify either high expectations for growth, which is the case for big tech companies like Nvidia and Microsoft, or that the company is overvalued.

Low P/E ratios often signify low expectations for growth, or that a company is undervalued.

Remember!!!

A high P/E doesn’t always mean the stock is “too expensive.” It might just mean the company is growing fast.

AND

A low P/E doesn’t always mean it’s a bargain. It could signal problems with the business.

That's why smart investors look at P/E ratio alongside other factors to make sure they're getting the full story.

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Pick out one of your favorite companies and find its P/E ratio. Do you think the company is over/undervalued? Does growth potential offset a higher P/E ratio, or do issues with the business make a lower P/E ratio deceiving? Let us know down below!