If you have ever been to a financial website to get a stock quote, you have come across “P/E”. The correct term is Price-to-Earnings ratio and it is widely used across the financial communities as a gauge for the profitability of a company. This is one of the first ratios that everyone looks for and there is a good reason why.

So what is the P/E ratio?
The P/E ratio can be obtained by the simple equation below:P/E ratio = price (per share) / earnings (per share)With the P/E ratio, it is possible to ask yourself “Am I paying too much for a companies earnings?”Over the years, value investors have become very fond of the P/E ratio as they use it to find undervalued companies.

What is a good P/E ratio?
A good Price-to-Earnings ratio for value investors is 12 and under. Anything over 40 is way overvalued and can’t be considered an investment, but there are exceptions to every rule. No P/E ratio means the company didn’t produce any earnings and should be approached with caution. Keep in mind that you should compare the P/E ratio with other companies in the industry.

In conclusion, the Price-to-Earnings ratio can help to forecast the future profitability of a company and to gauge the current “value” of the company. In todays heavily beaten up market, P/E ratios keep declining as stock prices decline. Using the P/E ratio with other forms of analysis can prove to be a good longer term strategy. Now go find some bargains and make us proud…

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