What Is The P/E Ratio and How Is It Used For Investing

Investing is a numbers game, and at the beginning it can be very daunting. One wrong move and a great deal could be lost in the blink of an eye, so knowing how to avoid disaster is paramount to success. However, that is easier said than done. Having the proper tools and knowledge is the first step forward in an investing career, and a great way to ensure that you stay ahead of the game.

This article’s intent is to shed some light on one of those tools in an investor’s arsenal, and will primarily benefit those just getting started. For those already familiar with the topic, it will be best to skip to the last section to learn a little more about why FAST Graphs has chosen to support the methods they do.

As mentioned, knowledge is an important tool. Having something at your disposal is great, but it helps to know how to use it. Therefore, understanding the concepts, formulas, and nuances to your tools is the perfect way to optimize your experience. To help prepare new investors for their career and to shed light on some things the veterans may not have known, this article will be covering the price-to-earnings ratio, or P/E ratio.

What is the Price-to-Earnings Ratio?

The P/E ratio is a very useful tool that can serve as a guideline for an investor, and also helps set a sort of standard in the market. This ratio is a formula that is simple and readily available, and uses information that is free and public, so just about anyone can use it without too much trouble. But as mentioned earlier, there is more to a tool than just having it. Knowing what it is will be crucial.

In short, the P/E ratio is a measurement of a company’s current share price relative to its earnings-per-share (EPS). In other words, it is a formula used to determine roughly what value the market will assign a particular stock. One thing to keep in mind is that not all people refer to this as the P/E ratio. Some call it the price multiple or even the earnings multiple, so when looking for more information this will be useful to keep in mind.