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.
