Measured Stock Analysis to Build Long-Term Wealth.

Demystifying the P/E Ratio

Photo by Anna Nekrashevich from Pexels

Get a glimpse into how to use a powerful stock analysis tool — the price to earnings ratio.

Far too often, novice investors look at a company’s stock price to determine the value of a stock. Stocks that trade with a high price per share are interpreted to be expensive and lower priced stocks are identified as cheaper.

Consider the following example:

  • Company A trades for $100 per share.
  • Company B trades for $1,000 per share.

Which company is more expensive?

At face value, it appears that Company B is more expensive. As investors, it is important to fundamentally change this way of thinking in an effort to recognize that a company’s stock price tells us very little about a company’s value. It is when we compare the stock price to other metrics that we can begin to gauge a stock’s value.

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