What is P/E Ratio?

Introduction

In this article I will be writing about the Price to Earning Ratio(P/E Ratio) and how it is calculated. If you are the new reader to this site, please read our article about the Mutual Funds and Stock Market. This month onwards I started writing on the stock markets and mutual funds. In this post, I am explaining one of the concept PE Ration which is used for judging whether the share is performing well in the market. If you have any doubts please post it in the comments section. Subscribe to our future articles here.

What is P/E Ratio?

A company’s share price divided by its earning per share gives us the P/E ratio. The earnings per share (EPS) is basically considered on the basis of net profit for the last four quarters. The following formula is used for calculating the PE ratio.

P/E Ratio = Share Price / Earning Per Share(EPS)

P/E ratio is one of the factor for determining the companies performance. But, experts advice that don’t make the decision only seeing the P/E ratio. Because the share price is decided based on the many factors.

It is very common that if the P/E ratio is good investors shows willingness to buy the share. Also you have to look for the other factors influencing the share price like quarterly result announcement, breaking news on the industry, etc.

Tips:

Compare the P/E ratio of the company with the average P/E ratio of the industry. If the company’s value is less than the industry average then buy the share. Even if the P/E ratio is less, the growth rate is very slow don’t buy that share.

Summary

The above article explained the very basic idea on what is P/E ratio and how it can be used. Please don’t use this knowledge for buying the shares before looking into other analysis on the stocks. If you have any doubts, please post it in the comments section.

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