Market MakeHer Podcast 59. What is P/E Ratio and Stock Valuation?
Oct 25, 2024
Explore the intriguing world of stock valuation and the P/E ratio, which tells you if a stock is a bargain or overpriced. Discover how earnings potential and market perception influence stock prices. Learn the difference between trailing and forward P/E and why the future matters. Grasp how identical stock prices can mask differing P/Es based on growth expectations and analyst estimates. Understand the significance of comparing P/Es within sectors and why context is key for any valuation strategy!
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P/E Ratio Basics
- P/E ratio equals a stock's price divided by its earnings per share and shows how the market values earnings.
- Use P/E to gauge how much investors pay for each dollar of a company's earnings.
Use Forward P/E
- Prefer forward (FY) P/E over trailing (TTM) because it reflects expected future earnings.
- Look for FY with a number on your brokerage to assess projected earnings.
Context Matters
- A stock's P/E must be compared to peers and its sector to know if it's cheap or expensive.
- The same price can be cheap or expensive depending on relative earnings and sector norms.