Value Investor Toolkit- P/E ratio

How many times have you been watching CNBC or any other business news show and heard them talk about the Price to Earning Ratio? The price to earning ratio, P/E ratio for short is a valuation of a company's current share price compared to per share earnings. It is calculated as

P/E = Price per share/ earning per share

A high P/E ratio generally means higher forecast earnings growth and low P/E ration means lower forecast earning growth. Investors can use P/E ratio as a way to compare companies within the same industry. Different industry have different average P/E ratio.

You will commonly hear the word price multiple when talking about P/E ratio. That is because P/E ratio show how much an investor is willing to pay for each dollar of earning. Example a P/E ratio of 15 would mean that investors are willing to pay $15 for each dollar of earnings.

P/E ratio can be used as a beginning tool for an investor when deciding on which company to invest in but it should by no means be the only only tool used.