1. What is the P/E Ratio?

The P/E (Price-to-Earnings) ratio is a valuation metric that compares a company's stock price to its earnings per share (EPS). It helps investors assess whether a stock is overvalued or undervalued relative to its earnings.

2. How Does the Calculator Work?

The calculator uses the P/E ratio formula:

Where:

• \( \text{Market Price} \) — Current stock price in dollars ($)
• \( \text{EPS} \) — Earnings Per Share in dollars ($)

Explanation: The P/E ratio indicates how much investors are willing to pay per dollar of earnings. A higher P/E suggests higher growth expectations.

3. Importance of P/E Ratio

Details: The P/E ratio is one of the most widely used valuation metrics in stock analysis. It helps investors compare companies within the same industry and make informed investment decisions.

4. Using the Calculator

Tips: Enter the current market price per share and the earnings per share (EPS) in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good P/E ratio?
A: There's no single "good" P/E ratio as it varies by industry. Generally, a P/E ratio between 15-25 is considered reasonable for most companies.

Q2: What does a high P/E ratio indicate?
A: A high P/E ratio may indicate that investors expect higher earnings growth in the future, or that the stock may be overvalued.

Q3: What does a low P/E ratio indicate?
A: A low P/E ratio may suggest that a stock is undervalued, or that the company is facing challenges that limit growth expectations.

Q4: Are there limitations to using P/E ratio?
A: Yes, P/E ratios can be misleading for companies with negative earnings, and they don't account for company debt levels or growth rates.

Q5: Should P/E ratio be used alone for investment decisions?
A: No, P/E ratio should be used in conjunction with other financial metrics and qualitative factors when making investment decisions.