On the P/E Ratio

        While researching, you may have come across something known as the P/E ratio, a numerical value that is an integral part of any investor's research. It is deceptively simple, calculated as the PRICE PER SHARE (the price the stock is trading at) divided by the EARNINGS PER SHARE (how much the stock has risen over the past twelve months). With this value, you can predict how a stock will behave over the next few months, and you can maximize your income.

        First, a small clarification. There are two types of P/E ratio: one for the past, one for the future. The trailing P/E ratio is calculated using the current price over the EPS (earnings per share) from the past twelve months. This is more accurate then the other type of P/E ratio, because it uses real earnings. The other type of P/E ratio is the foward P/E ratio. This is calculated using expected earnings, hence the "forward". As such, this value is usually less accurate and is not as reliable.

        Higher P/E ratios indicate the expectation of growth in a company by investors. A company with a high P/E ratio is expected to grow over the upcoming months and increase its earnings. If the stock does not live up to these expectations, the price of shares will drop. Additionally, higher P/E ratios mean that a stock is generally more "expensive" and is worth more then a stock with a low P/E ratio. A slowly-growing stock with a high P/E ratio is usually overvalued, and could plunge in the near future.

        Lower P/E ratios could potentially mean that the stock is undervalued, and may rise in the future. However, it could also mean that the company is heading for trouble, and could drop in the future.

        While the P/E ratio is an important and useful tool for investing, by itself it is not that helpful. In order to successfully invest, you should use the P/E ratio along with other numerical data.

Disclaimer: Trading stocks has extremely high risks, and should not be taken to lightly without a thorough understanding. This is written from a purely commentary point of view and is not meant to suggest buying, selling, or holding a stock. All traders must do their own research prior to investing. We (StockQuests) are unaffiliated with all of the companies that are mentioned on this blog, and can't be held responsible for any losses that may occur. Invest at your own risk.