The price of profit
When you buy a stock, you are really buying a share of the company future earnings. The P/E ratio helps you assess whether you are paying too much or too little for those earnings.
The formula: P/E = Share price divided by Earnings per share (EPS)
Low P/E
Below 15 is often considered cheap. Either the stock is underpriced and a good buy — or the market believes the company will perform worse in the future.
Medium P/E
Between 15 and 25 is normal for most mature companies. Neither cheap nor expensive.
High P/E
Above 25 means investors expect strong growth ahead. The risk is that if growth fails to materialize, the stock can fall sharply.
Warning: The P/E ratio alone does not tell you whether a stock is a good buy. Always look at it in context.
"Knowledge is your sword and shield. The one who understands numbers understands the world."— Florence Scovel Shinn