#79 - PE Ratio Explained (CBM Basics)

What is a PE Ratio?

It’s one of the most common valuation metrics.

The price-to-earnings (P/E) ratio relates a company’s share price to its earnings per share.

A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future.

Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.

How to calculate?

Price (price of stock or market cap) / Earnings per share (net income ttm / outstanding shares)

When to use it?

As you can see, PE ratio only shows data for a year (TTM). It doesn’t give you the full picture. It’s a great way to compare businesses in the same industry and how they performed in the year.

The other way to use PE is to compare it against the S&P standard. The standard S&P PE has been 15. Considering risk factors, analysts usually consider 20 to be a good PE ratio. If your business has a PE below 20, it is good.

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The information in this video is general information only and should not be taken as constituting professional advice from Atit or Tapan. Atit and Tapan are not financial advisers. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances. Atit or Tapan are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this video.

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