P/E Ratio = Market price / Earcning per
share
Apart from stock valuation, it tells us multiple things
such as
- It shows the expectations of the market and the price we must
pay for current earning of the comapny. Earning is very important
as investors come to know how profiatble a company is. Therefore it
help us to know the profotability of the company.
- It also help us to know whether we are paying a fair price or
not.
- When companies of same nature are grouped, it is P/E Ratio of
the company which help us to comapre them.
- Companies with high P/E Ratio indicate that they have positive
future performance and investors are willing to pay more for
them.
- The main purpose of the P/E ratio is that it standardizes
stocks of different prices and earnings levels.