Question

the price-to-earnings ratio (P/E) is one of the most common stock analysis tools used by investors and analysts for determining stock valuation. In addition to demonstrating whether a company’s stock is over- or under-valued, what else can P/E tell us?

Answer 1

P/E Ratio = Market price / Earcning per share

Apart from stock valuation, it tells us multiple things such as

1. 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.
2. It also help us to know whether we are paying a fair price or not.
3. When companies of same nature are grouped, it is P/E Ratio of the company which help us to comapre them.
4. Companies with high P/E Ratio indicate that they have positive future performance and investors are willing to pay more for them.
5. The main purpose of the P/E ratio is that it standardizes stocks of different prices and earnings levels.