Coinbase Stock and the Danger of the P/E Ratio

Ultimately, investing involves buying something for less than it's truly worth. Figuring out how much something is worth is easier said than done. For a stock, investors need to weigh current financial performance, the quality of the balance sheet, future growth prospects, macroeconomic conditions, and a host of other factors.

The price-to-earnings (P/E) ratio is a shortcut. Take the stock price and divide it by earnings per share, and you get a number that tells you how expensive a stock is based on current profits. Historically, the S&P 500 has averaged a P/E ratio around 16.

This obviously doesn't work well for growth stocks with scant earnings, but it can be useful for mature, somewhat predictable companies. If you assume that earnings are sustainable, the lower the price, the lower the P/E ratio, and the cheaper the stock.

Source Fool.com