Michael97 Posted May 13, 2020 Share Posted May 13, 2020 What is the role of the P/E ratio and how does it help set a value on a stock? Quote Link to comment Share on other sites More sharing options...
0 Beniamin Thomas Posted May 13, 2020 Share Posted May 13, 2020 Hi Michael, thanks for the question. The P/E ratio is one of the most popular valuation methods applied by financial analysts to determine the stock value. You can often read in the media about how a specific company performed, with the P/E ratio popping up in conversations quite often. Similar to earnings per share (EPS) method, the P/E method is very popular due to its simplicity and mass adoption. In essence, you don’t have to be a financial genius to calculate the P/E ratio of the company. It is simply calculated by dividing the current market price per share with the basic EPS to get the P/E ratio. For instance, if Facebook trades at $30 per share and its reported EPS is at $3, that makes the P/E ratio at $10. Analysts mostly use it to compare companies in the same sector and ultimately determine if the stock is relatively overvalued or undervalued. It is important to note a difference between the Forward P/E ratio which is based on the estimated earnings per share rather than financial results reported by the company in the past, the values used to calculate the Trailing P/E. Quote Link to comment Share on other sites More sharing options...
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Michael97
What is the role of the P/E ratio and how does it help set a value on a stock?
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