Why Is There So Much Variation in the P/E Ratio of Different Companies?

Why Is There So Much Variation in the P/E Ratio of Different Companies?

A stock's price-to-earnings ratio, or P/E ratio, is an expression of how expensive a stock is relative to the profits generated by the underlying company. Because of factors such as risk and growth rate, P/E ratios of different companies often vary considerably. Therefore, while P/E ratios are certainly useful tools in stock analysis, they are just one piece of the puzzle and should be considered along with several other metrics.

The P/E ratio is a measurement of how expensive (or cheap) a stock is relative to the profits it generates. To determine a P/E ratio, simply take a stock's current price and divide it by its annual earnings per share. For example, a stock trading for $20 that earns $1 per share would have a P/E ratio of 20.

Image source: Getty Images.

Continue reading

Source: Fool.com