What is PE Ratio
What is PE Ratio
The PE ratio or the price-earnings ratio is a financial ratio which helps us to measure the current market price on a share with respect to the face value per share.
The price-earnings ratio of a stock depends upon how much an investor can achieve or earn by investing in the stocks, with respect to the current share price of the firm.
The fluctuations in the market price of a share or a stock generally depend upon the total demand with respect to the total number of outstanding stocks. As the demand in the market increases the value of each share goes up because the number of outstanding stocks remains constant and if the demand for the stocks decreases the value or the current market price of the stock also falls down.
The current price of a stock may also depend on many other external factors such as natural calamities, economic conditions of the country, a sudden change in government laws, sectoral growth, social causes etc. It may also depend upon many internal factors such as strategy of the firm, changes in the organization structure of the firm etc.
The earnings per share are the total added value which is realized by adding the retained earnings to the previous face value of each share, The face value of share only depends upon the financial scenario of the firm and does not get influenced by any kind of external or internal forces acting upon it.
The price-earnings ratio gives the investors an idea of how much they can earn or achieve by investing in the stock for the coming future.
PE Ratio = Market value per share / Earnings per share
Different investors have different opinions of investing in the stocks of a company by looking at its PE ratio. With a high PE ratio an investor may feel that the company is about to grow in the future and may decide to invest in the firm but on the other hand, another investor may feel that the share price of the firm is overvalued and may decide not to invest in the firm.