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.

Low P/E

  • 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.

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