3 ms·

If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. Suppose the share price and the p

If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. Suppose the share price and the profit remain equal, then it takes 20 years for the earnings to "cover" the price of the share. That's the spirit of the P/E ratio, in my opinion. Others would simply tell you that it is: (share_price / earnings_of_that_year) == price_to_earnings_ratio Sometimes analysts will say that a P/E ratio is too low or too high based on what industry competitors trade at. So, perhaps there was a time where you read that an analyst and/or news outlet believed that the P/E of Apple was too high relative to its analyzed peers (e.g. Microsoft - assuming Microsoft was seen as a peer back then). Whether one should or shouldn't trade based on a particular P/E ratio has always been a matter of opinion.

Sohcahtoa82 3y ago
> If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. It's based on market cap, not share price. Market cap is a function of share price (It's just share price * number of outstanding shares), of course, but to just say it's share price leads to misunderstandings. Otherwise, that would imply that a stock split creates a multiplier of the P/E, ie, a company with a P/E of 20 does a 1:5 split ends up with a P/E of 100 post-split, and that's certainly not what happens.
- Sohcahtoa82 3y ago
  Instead of silently downvoting, how about telling me why I'm wrong. P/E is defined usually defined as `share price / earnings per share`. Market cap is `share price * number of shares`. Via simple substitution, this means P/E is equal to `market cap / earnings`. But calling P/E `share price / earnings` is simply incorrect.
  - acchow 3y ago
    In finance circles, the word you are using for "earnings" is usually called "net income" (or "net income for common stockholders"). When people say "earnings" they usually are referring to "earnings per share". In short: net income is total, "earnings" is "per share"

Sohcahtoa82 3y ago

> If a share of a stock is $100 and the profit of the company is $5 for that year, then the price to earnings ratio (P/E) is 20. It's based on market cap, not share price. Market cap is a function of share price (It's just share price * number of outstanding shares), of course, but to just say it's share price leads to misunderstandings. Otherwise, that would imply that a stock split creates a multiplier of the P/E, ie, a company with a P/E of 20 does a 1:5 split ends up with a P/E of 100 post-split, and that's certainly not what happens.

Sohcahtoa82 3y ago
Instead of silently downvoting, how about telling me why I'm wrong. P/E is defined usually defined as `share price / earnings per share`. Market cap is `share price * number of shares`. Via simple substitution, this means P/E is equal to `market cap / earnings`. But calling P/E `share price / earnings` is simply incorrect.
- acchow 3y ago
  In finance circles, the word you are using for "earnings" is usually called "net income" (or "net income for common stockholders"). When people say "earnings" they usually are referring to "earnings per share". In short: net income is total, "earnings" is "per share"