Securities For Beginners

Friday, December 16, 2005

Terms Explained - P/E

A brief guide to ratios and financial statements - Part I: P/E

An important ratio reflecting the inverstors' expectations reagarding a single stock is the P/E - the Price-Earnings ratio. It's often published in advanced stock tables and expresses the relation between the stock price and the earnings per share.

It is calculated by dividing a company's stock price by its earnings per share:

P/E = stock price / earnings per share

with

earnings per share = total net income / number of outstanding shares


The lower the P/E the more attractive a stock is assumed to be. But be careful: A low P/E is not a guarantee that a stock is a "strong buy"! Nevertheless it is useful to compare stocks from different companies in the same industry, because in some industries the P/E is traditionally higher or lower than in other industries.
Since the stock price also reflects the investors' expectations regarding the growth and future development of a company, a high P/E may be the result of high expections of the inverstors.

Next term to be explained: Cash Flow

For further information look here:
Investopedia: Understanding the P/E Ratio
Invest FAQ: Analysis - Price-Earnings (P/E) Ratio

3 Comments:

  • I couldn't figure out how to contact you, so I thought I'd comment on your latest post. You may want to include an RSS feed for those users (such as myself) who's blog reader doesn't support Atom yet. (I'm using the awesome Yahoo! Mail Beta). Also, a contact form :)

    Cheers!

    By Blogger Chris, at 2:17 PM  

  • Thanks for the advice, Chris. Since I am new to blogging I really appreciate it. I added my e-mail address to my profile and added the feed to feedburner. I hope it works... I'd like to add a contact form instead of simply writing the e-mail into my profile, but unfortunately Blogger doesn't offer this feature (at least I think so). I have to think about it when I have more time, but I'm afraid this will take until February.

    By Blogger skipper, at 5:31 PM  

  • Excellent explanation

    By Anonymous PENNY STOCK INVESTMENTS, at 6:29 PM  

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