Price to earnings ratio (P/E)

Price to earnings ratio (P/E) is one of the indicators of market value and capital market. It indicates how much are the investors willing to pay per unit of profit.      

The indicator is primary but not the only indicator used when making investment decisions.

Calculation formula

The indicator is uninterpretable if the profit is negative.

Useful comparisons are with

• companies in the same industry
• industry average

But comparisons with companies in different industries or with past developments can be misleading.

Interpretation

• the higher the values, the better (investors expect earnings growth in the future) (17)
• lower values may indicate either:
  • the company achieved during the reporting period high profit compared with the trend of the  recent years (17)
  • underestimation of the market price of shares (e.g. the market has still not responded to earnings growth), which makes the shares interesting for the purchase (17)
• high values ​​can be assessed inversely

Recommended values

The average value is usually about 20-25 (17), but it depends on economic conditions and the market in which the company operates.

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Sources:

17.  Price-Earnings Ratio - P/E Ratio (online). Citation date: 7.11.2015. Available from www: http://www.investopedia.com/terms/p/price-earningsratio.asp?optm=term_v2