ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The most common use of the P/E ratio is to gauge the valuation of a stock or index. The higher the ratio, the more expensive a stock is relative to its earnings. The lower the ratio, the less expensive the stock. In this way, stocks and equity mutual funds can be classified as “growth” or “value” investments.

Detailed explanation-2: -The P/E for a stock is computed by dividing the price of the stock by the company’s annual earnings per share.

Detailed explanation-3: -Example of a P/E Ratio Calculation If a company’s stock is trading at $30 for one share, and the company’s annual earnings per share is $1, then that company’s P/E ratio is 30/1 or 30x. All that really tells us is that for every $30 stock, the company earns $1 per year.

Detailed explanation-4: -Price to Earnings Ratio or Price to Earnings Multiple is the ratio of share price of a stock to its earnings per share (EPS). PE ratio is one of the most popular valuation metric of stocks. It provides indication whether a stock at its current market price is expensive or cheap.