What is P/E ratio and why does it matter?

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The P/E ratio, or price-to-earnings ratio, is one of the most widely used stock valuation metrics in both the academic and real world. The ratio allows investors to gauge how expensive a stock is relative to its earnings, or profits per share (EPS). A high P/E ratio means that the market believes that the company’s earnings are high and will likely continue to grow in the future; conversely, a low P/E ratio indicates that investors believe the company’s earnings are likely to decline in the future or remain stagnant at best.

The History of P/E Ratio

The price-to-earnings (P/E) ratio is the most widely used valuation metric in stock market investing. It measures the market’s expectation of a company’s future earnings by dividing its share price by its earnings per share. The ratio has been used for over a century, but its popularity really took off in the 1960s when Benjamin Graham, the father of value investing, popularized it.

Read more about what is P/E ratio here. 

How Do We Calculate P/E Ratio

The price to earnings ratio (P/E Ratio) is the measure of the share price relative to the annual net income earned by the firm per share. It’s easy to calculate: simply divide the market value per share by the earnings per share. The result is a number that indicates how much investors are willing to pay for each dollar of a company’s earnings. For example, if a company has a P/E ratio of 20, this means that investors are willing to pay $20 for every $1 of earnings.

Why Does a Company’s P/E Ratio Matter?

A company’s P/E ratio is important because it provides insight into how much investors are willing to pay for each dollar of a company’s earnings. A high P/E ratio indicates that investors are willing to pay more for the company’s stock, while a low P/E ratio indicates that they are not. The P/E ratio can also be used to compare different companies within the same industry.

Example of PE ratio for Apple.

The Risks and Rewards of an S&P 500 ETF

S&P 500 ETFs are a popular way to invest in the stock market, but they come with some risks. One of the biggest risks is that you are investing in a large number of companies at once, which can be risky if one or more of those companies run into trouble. However, the rewards can be great as well, since you are diversified and have the potential to make a lot of money if the stock market goes up.

Choosing a Different Market ETF

The P/E ratio, or price-to-earnings ratio, is a measure of how much investors are willing to pay for each dollar of a company’s earnings. It’s calculated by dividing a company’s share price by its earnings per share. A high P/E ratio means that investors are willing to pay more for the company’s earnings, while a low P/E ratio means they’re not willing to pay as much.

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