Definition

The price to earnings ratio is the ratio comparing a stock price to a company’s earnings per share. For example, if a stock is trading at $50 per share and the company earnings are $5 per share, the PE ratio is $50 to $5 or 10. PE ratios are commonly expressed as a single number rather than the two separate numbers used to compute the ratio.

High PE Ratio

A high PE ratio signifies that investors are paying a premium for a stock in relation to company earnings. A stock with a high PE ratio is said to be overvalued by some market analysts. However, the high PE ratio can also be a sign of strength, as it means that investors are willing to pay a premium for a stock. For instance, if investors are optimistic about a company’s future growth, demand for the stock will increase and consequently the PE ratio will also rise.

Considerations

References

More Like This

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