Price to Earnings Ratio
Measures how much you are paying for the company’s earning.
The higher the price-to-earnings ratio the more expensive is the stock price.
Higher price-to-earnings ratio indicates that the company is very popular and it attracts more buyers in the market.
Average P/E Ratio = 17
High P/E Ration > 25
High P/E companies are very optimistic about future and stock price are overvalued and when bubble happens investors are more likely to lose quite a lot.
- Company is undervalued, trading at low price
- Company most likely have high earnings
It is best to find the correlation between low P/E ratio and above average returns.