Which is the ratio of price per share to earnings per share

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When investing in stocks, investors often base their decision on the P/E ratio, which is the ratio of price per share to earnings per share.

Suppose that there are two stocks of similar companies in the same industry, and that one of them has a P/E ratio of 15 and the other, a ratio of 20. Which of these two stocks would you invest in?

Consider Microsoft and Alphabet (the parent company of Google). (These are not strictly comparable as Microsoft is classified as an information technology company and Alphabet is usually referred to as an internet company.) Microsoft has a P/E ratio of about 72 while Alphabet, a P/E ratio of 58. What do you think is the reason for the difference in the P/E ratios?

Note that there is no single correct answer to these questions. But whatever stand you take, you need to be able provide some good reasons for it.

Reference no: EM131970084

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