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Calculating The Price Earnings Ratio

The price earnings ratio is the number that is looked at more than any other on the stock market. The price earnings ratio examines the relationship between a company's earnings and the stock price. This is the most popular form of stock analysis, but it is important for any investor that they do not rely on just one type of information to guide them. The price earnings ratio is calculated by dividing the earnings per share of a company by the share price. The formula looks like this: Price Earnings Ratio=Stock Price/ Earnings Per Share.

Why is the price earning ratio important to stock traders? This ratio is used by traders to get a basic assessment of what the market will pay for the earnings of a company. The higher the price earnings ratio is, the more money the market is willing to pay for earnings from a company. Some investors stay away from stocks that have a high price earnings ratio, and this may be because they think the stock is overpriced. But a high price earnings ratio may also mean that there are high hopes for the company on the market. A low price earnings ratio may mean that there is no confidence in the company on the market, but that does not make this stock a loser. Some stocks, called sleepers, are good stocks that get overlooked by the market. These sleeper stocks are also known as value stocks, and many traders have made a killing by recognizing these stocks when the market does not. There is no right or good price earnings ratio. One investor may see a value stock while another investor disagrees and sees junk stock.The right price earnings ratio is determined by the individual investor.

The price earnings ratio is one of the most frequently used stock analysis tools, but this number is not the only thing that experienced traders use to determine stocks to trade. This ratio is not complicated to calculate, and it gives a basic idea of what the market will pay for earnings from a specific company. The price earnings ratio can mean different things to different traders, depending on their trading strategies. One trader may see a stock with a low price earnings ratio and think of the stock as a loss, and another trader may see the same stock and same low price earnings ratio as a sleeper or value stock that is worth investing in. Calculating the price earnings ratio is an important financial tool used by market traders to help them predict the market.

Copyright 2007 Joel Teo. All rights reserved.
Joel Teo
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