What is P/E and how can you use it?
What is P/E?
Price per earnings shows the ratio of the current market value of a business (or any other security that is producing earnings) with relation to its earnings. In other words, you could say that P/E describes the amount of years it would take with current earnings to make the amount of money required to buy the company at current price. It is one of the seven metrics we supply our users at Rikas.ai for a fast glance to find the intrinsic value of a stock, as we believe it to be a wonderful metric when used in together with the other metrics.
P/E = Price per Earnings = Market Cap / Net Income
The P/E value can be found easily on any notable stock investing site. If you need to calculate it yourself however, you will need to dig through the financial statements. To find the P/E value of a stock, you will need to multiply the current share price with the amount of shares available (market value/market cap). Then you will need to divide the result with the earnings (net income), which can also be found in the financial statements.
How can you use it?
As with most metrics, P/E needs to be digested with a grain of salt, as there are many types of different businesses with varying growth possibilities and expectations. However, if you know how to use it, it can be quite powerful. For example, a higher P/E is more acceptable for businesses with higher consistent growth. Since you can be quite certain that the earnings will keep growing in the future too.
Due to its nature P/E might be a useful indicator when comparing businesses within an industry — it is good to measure up the P/E ratios especially when having two rivalling options with similar growth potential.
In addition to specific businesses, P/E is also used as an indicator of the valuation of the market. A high overall P/E can often be a telltale of an overbought market.
Disclaimer: I am not a registered investment advisor and thereby do not guarantee the accuracy or completeness of any data or methodology included in this blog post. The information is provided for entertainment purposes only.
