PE Ratio
If there is a number that people depend on than more any other number, in such case it is referred as the Price to Earnings Ratio (P/E). The P/E is a ratio that investors cast off with confidence as if it assured the complete story.
The PE ratio looks at the relationship among the stock price and the earnings of the company. The PE ratio is the most common stock analysis ratio, even though it is not the only one investor should consider.
Investor can calculate the PE ratio by considering the share price and dividing it by the Earnings Per Share of the company.
P/E ratio = Stock Price / Earnings Per Share
For instance:
A company with a share price of Rs. 80 and an Earnings Per Share of 16 would have a P/E of: 80 / 16 = 5
Some investors read a high P/E ratio , considered as an overpriced stock. All the same, it can also suggest the market has high promises for this future of stock and has bid up the price.
With the terms of the relation reversed, a low P/E ratio may suggest a vote of no confidence by the market. It mean that the market has just neglected the stock. Many investors build their lucks spotting these neglected but basically strong stocks before the rest of the market came across their true worth. In other words, the P/E determines what the market thinks of a stock.
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