Question

we would expect P/E ratio to change in theory？

In practice， how and why it changes.

Answer 1

Let's start with the meaning of P/E Ratio:

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.

Formula:

P/E Ratio= Earnings per share/Market value per share​

It is also used to show whether a company's stock price is overvalued or undervalued, the P/E can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 Index.

Generally, a high P/E ratio means that investors are anticipating higher growth in the future.

There could be multiple reasons for the change in the P/E Ratio of a company:

• The general market enviornment plays a vital role in the change of the ratio. For example, if a company's stock has increased by 50% in last 4 years, the average of the ratio will also increase with the increase in the price of a share.
• Financial strength and any company-specific risk. Companies that are perceived by investors as stronger or more stable tend to trade for higher P/E ratios when compared to similar companies that are thought to be riskier.
• anticipation of growth.

Although P/E Ratio is an important indicator, it is just one of the measures.