Theoretically, the market price of a share(MPS or just P here) is the discounted value of all the future dividends to be paid by a company, in the view of the share holders (based on the performance of the company and its business environment). Dividends(EPS or just E here) paid by a company has a very good co relation to the earnings of each company. So theoretically, the PE ratio is affected based on the shareholders intuition of what will be the future earnings and dividends of a company. A higher PE ratio than the industry means the shareholders expect that company to have more earnings and distribute more dividend than the other companies in the industry.
Jan 18 2013 07:46 PM
It is not mandatory to compare, but it is a very good yard stick to compare companies!