Lingo every investor should know
P-E: a fiscal fitness exercise
Even if you hated high school gym class, you have no reason to dread P-E. In fact, it's a good exercise for measuring the condition of a company. The price-to-earnings ratio is one of the most basic ways to gauge stocks.
To get the P-E ratio is no sweat. Just divide the stock price by its annual earnings per share. If a stock is selling for $10 and it earned $1 per share in its most recent fiscal year, the P-E is 10.
There's no right or wrong ratio: Some companies with low earnings have a high P-E because investors think earnings will grow in the future. Conversely, a reliably profitable company may have a relatively low P-E because its earnings are expected to remain stable. Those are often called value stocks, says Ferri. A P-E can change often, since it is dependent on profit levels and stock prices.