Overview of the P/E Ratio
The full form of P/E ratio is “Price-Earnings Ratio”. It
means the amount you’re paying to earn a single dollar. It’s necessary to check
out the P/E ratio before purchasing a stock of a company because it will give
you a hint of how the stocks are priced in the market. Some people prefer to
purchase stocks with a lower P/E ratio, whereas some people don’t care much about
P/E ratio.
Is high P/E ratio always bad?
You may be thinking that it’s not a good thing to buy a
stock with a high P/E ratio. It’s correct at times, but you may also be wrong
at some other times. The truth is that the high P/E ratio is not always bad and
a low P/E ratio is not always good. You must think a lot before getting to a
conclusion.
It’s a difficult job to decide what an optimum P/E ratio for
the stock is. In some industries, there may be a comparatively higher P/E ratio
for the stock in comparison to other industries. You should check out the P/E
ratio of the various companies of the same industries to decide what the
optimum P/E ratio for the stock is. In this section of this article, I will
give you a few reasons why a higher P/E ratio may not always be a bad choice.
1. The high potential for the business to
expand
There are some businesses that look very promising, and
those stocks usually have a higher P/E ratio. If there’s an innovative product
and many people love it, there is a chance that it could have a higher P/E
ratio. For an instance, the Amazon has a massive P/E ratio because people have
huge faith in the Amazon’s growth potential.
2. Continual and stable growth
Some company’s growth is very stable. If the earning per
share (EPS) is continually growing at a stable rate, then the P/E ratio of that
stock may be high because people will keep on buying that stock. It may not be
such a bad choice to purchase the stock.
3. Well-capable management team and wonderful
products
If the company has a well-capable management team and they
are about to introduce some wonderful products in the market, it may not be
such a bad choice to purchase a stock with a higher P/E ratio.
Conclusion
It’s your decision on what stocks to invest. Before
investing in a stock, you should decide how much you’re willing to pay for a
specific stock. It’s good to listen to the people, read some books and
articles, but the thing is that you should not buy the stock just because
others are asking you to buy the stock. You should be capable enough to do your
own analysis before you decide to invest in a stock market.
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