P/E ratio (Price Earning ratio) - your guide to stock investment

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The P/E ratio is a measure of the price paid for a share relative to the profit per share. A higher P/E ratio means that investors are paying more for each unit of income. The price per share (numerator) is the market price of one stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. Investors can use the P/E ratio to compare the value of stocks. If one stock has a higher P/E that of another stock, all things being equal, it is a less attractive investment. Normally, stocks with high earning growth are traded at higher P/E values, because investor anticipate the high growth. One important screener for value investing is P/E.

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