Investing Basics: What is the Price/Earnings Ratio?

There are thousands of stocks to choose from, so how do you know how much to pay for stocks? How much is too much? And how do you know that you’re purchasing a good deal? Investors calculate the value of stock through stock valuation, methods used to determine the value of the stock. One of the methods is the P/E ratio, or Price/earnings ratio. In order to determine this number you divide the price of the stock per share by earnings per share – a simple math equation.

However, the tricky part is deciding which number to use for earnings per share. And it gets trickier. No one knows. You can the amount of the past four quarters or predictions for the following year. According to CnnMoney.com, the P/E ratio determined by the past four quarters is your best bet because it offers a clear understanding of the current valuation.

If you’re like many investors, you will also want to look into the future. In this case, you can also consider estimates. Regardless of how you calculate the P/E, investors can’t predict that a business will meet the predictions. So why use the P/E? While it is not a good indicator of whether you should buy or sell a stock, it can tell you whether it is undervalued or overvalued. In other words, it can let you know if you’re getting a deal.  Finally, it’s important to know that just because a stock price is more expensive than another, doesn’t mean it is in fact more expensive.

This blog was submitted by Plan B International, a Florida-based real estate agency providing investing opportunities in pristine locations throughout the world. To buy or sell through this experienced firm, please visit the website Planbinternational.com.