by 1 Cylivers
When the stock markets are booming all picks deliver the goods. It is often in the not so good times that the worth of a good stock investment is esteemed.
There are two things to look out for in a good stock –
- A well-managed and profitable company and
- A good price.
The P/E ratio is a measure of the profitability of the company and the price of its stock. P/E is short for price/earnings. It is the price per share divided by the earnings (or profits) per share or EPS. For example, for a stock trading at $50 with an annual EPS of $5 the P/E ratio is 10.
The P/E ratio is essentially how much the stock is trading at for every dollar of earnings from the firm. A P/E of 10 implies you pay $10 for every single dollar that the company earns as profit. That said it is obvious, a lower P/E ratio means a better value for money.
There are other considerations when evaluating a pick on the basis of the P/E ratio. High earnings today with a poor future would tend to have a low P/E as the demand for the stock and consequently the market value would be low. This is usually not a good pick.
Core sector industries tend to have a low P/E ratio, whereas the hi-tech industry has a high ratio. It is prudent to compare the P/E ratios of stocks within an industry. Another good technique is to compare the current P/E to the 1/2/3 year average. A low current P/E is usually a good pick.
Experts do a lot more intensive analysis but if you wish to test the waters on Wall Street yourself, the P/E ratio may well be your first friend.
Comments
- sshafeeq, Jun 22, 2008 at 07:54 PM PDT said:
It is easy to pick a good scrip in a bull market...but, very difficult in a bear market!
