Contributed by: Johnny
Hello guys, I am back again today. This time I will be switching from talking about life and the world to another world, stocks. In this post as you can probably see from the title, I will be talking about the significance of a P/E Ratio in stocks. So first of all what is a P/E Ratio? A P/E ratio (short for price to earnings ratio) is the ratio of the company’s share price to the company’s earnings per share (EPS). This basically (to me) shows how good the stock is doing at the time. For example on Google, it says, “A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future.” What this is basically saying is that investors invest in stocks with higher P/E ratios believing that the stock will grow in the future.
You may be asking “what is the reason for this blog post about P/E ratios?” Well, my uncle gave me a homework assignment about using the P/E ratio formula to find the P/E ratio for 5 companies. Then I had to write the significance of a P/E Ratio to a company’s stock. Then after completing that I was asked which stock I would choose depending on the P/E ratio. And I thought that I would share it with you guys. So the five companies that I chose to find the P/E ratio of were Amazon, Texas Instruments, Kraft, Starbucks, and Apple. What I wrote as the significance of a P/E ratio was “The P/E ratio shows how much you pay to match $1 of the companies profit.”
Also included in the paragraph above was an old planning pie chart with investment ideas on it.
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