The Almighty P/E Ratio

• The P/E ratio is the current stock price of a company divided by its earnings per share (EPS).
  
• Variations exist using trailing EPS, forward EPS, or an average of the two.
  
• Historically, the average P/E ratio in the market has been around 15-25.
  
• Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings.
  
• A better interpretation is that the P/E ratio is actually a reflection of the market's optimism concerning a firm's growth prospects.
  
• The P/E ratio is a much better indicator of the value of a stock than the market price alone.
  
• It's difficult to say in general whether a particular P/E is high or low without taking into account growth rates and the industry.
  
• Changes in accounting rules as well as differing EPS calculations can make analysis difficult.
  
• P/E ratios are generally lower during times of high inflation.
  
• There are many interpretations as to why a company has a low P/E.
  
• Don't base any buy or sell decision only on the multiple.