Every chart provides the current price of an asset. But how do you understand if this asset is cheap or expensive at any given time? That’s where a price-to-earnings ratio comes in.
What Is a P/E Ratio?
P/E ratio is the measure of a company’s stock price relative to the earnings per share. This ratio is calculated by dividing the current stock price by its earnings per share (EPS). Being easy to gauge, a P/E ratio is a tool to estimate the fair value of the stock market.
While a company’s take on their performance is expressed in an earnings report, a P/E ratio reflects the investors’ view of the company – how much they are ready to pay for $1 worth of earnings.
Why Does It Matter?
P/E ratio helps to distinguish undervalued or overvalued assets. In other words, it helps StockBattle entrants see if an asset has short-term revenue prospects or not. Mixing top stocks with undervalued ones is undoubtedly a winning strategy for any portfolio.
However, you should remember that “E” may mean past earnings per share (for the past 12 months) or an estimate of a company’s future earnings (depending on the type of a P/E ratio). In any case, the future may be very different as the market can be unpredictable. So use this metric with caution.
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