Price/Earnings Ratio (P/E)

What is it? An indicator of a stocks value. To figure out the price-earnings ratio, you divide the stocks price by its earnings per share for a 12-month period. For example, if a stock is selling for $30 and is earning $3 a share, its P/E ratio is 10 (30/3). Applied to mutual funds, the P/E ratio is the weighted average of all the stocks P/E ratios in the mutual funds portfolio. Larger positions have greater influence on the funds overall P/E, an indicator of the type of stocks the fund holds. The P/E ratio provides insight into valuation using an easily understood yardstick: earnings. Stocks with high P/Es compared to the overall market are typically growth stocks. Investors are willing to pay a premium because they expect the companys earnings and stock price to rise. Stocks with low P/Es are sometimes considered overlooked value stocks. Because earnings are volatile, and sometimes negative, the P/E has its limitations and may fail as a measure for a significant number of stocks at any given time.

Added By: Parker

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