P/E is the most popular metric for valuing how cheap or expensive a stock price is relative to its competitors. It works when comparing apples to apples, not apples to oranges. So we can use P/E to compare Ford Stock GM Stock, but it doesn’t make too much sense to compare a P/E ratio of TESLA stock to Walmart stock. When utilizing P/E ratio, stick to the same sector to make P/E analysis most effective.

Mathematically, it is the current price per share divided by the earnings per share.

A very high P/E ratio could mean that the underlying company is overvalued at the moment, but it can also mean that investors are expecting rapid, high growth rates in the future which would bring the P/E value down with time.

It answers the question of how much money investors are willing to pay today for a certain stock relative to the earnings per share.

If there is no P/E ratio for a company, it simply means that the company is not profitable and so it has 0 earnings, and since 0 cannot exist in the denominator of a fraction, the Price to Earnings per share is undefined (not listed).

Although the P/E ratio is a very helpful metric when analyzing a stock, it does not paint the big picture and should be used with other metrics, analysis, research, etc. when making investment decisions.

Why do people buy low P/E stocks? Typically, it’s because investors see them as undervalued and believe that future projections for growth are being undervalued. Conversely, investors buy high P/E stocks because they feel the company will actually outpace the predicted growth and the P/E will look more appealing down the line. When a stock is growing at a very high clip as far as revenue, earnings, expansion, etc. investors typically will tolerate a higher P/E ratio.

A value trap occurs when folks buy stock in companies with a low P/E ratio because they assume it’s a good bargain whereas the reason for the low multiple is actually that they are experiencing financial turmoil and have minimal future growth potential.

***I am not a financial advisor or crypto advisor; this video is meant to be used for entertainment purposes only and represents only my personal opinions***

Sources: Investopedia, Personal Experience

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