PE is one of the important things that you need to check before investing in any particular stock. It is calculated by dividing the current market price of the stock by its earning per share (EPS). In lay man's term It is the sum of money you are ready to pay for each rupee worth of the earnings of the company.
Mar 21 2014 03:01 PM
PE = Market price / EPS
For example there are two companies 'Company A' and 'Company B', operating in the same sector and assume PE of 'A' is 45 and PE of 'B' is 30, then 'B' is considered to be a better to buy. But 'A' considered to show higher growth prospects as compared to 'B'.
One important factor is that while you are comparing PE of two different stock they should belong to the same Sector i.e Generally you should not compare PE of IT stock with a manufacturing stock because every sector has its standard PE.
PE ratio is not totally neutral. Based upon market sentiment (announcement of a major order or acquisition by the company)PE might go up. Also low PE always may not signify a good buy but could signify more serious issues facing the company. So it is very important to do a through research into the background of the company, before investing.