Hi guys! I start learning about stocks and market with the Khan Academy program which I start learning all the basics. But, I really want to learn well . I am stuck in one thing which is The Price to Earning Ratio. I google and everything and I am so confuse about this.. Explain to me the Price to Earning ratio? Example: If the Price per Share is 100$ and The EPS is 1$ , The P/E is 100, but what if the EPS is 2$ the P/E becomes 50 so why the second one is better? thank you
PE is the number of years it would take for earnings to equal the price you are getting ready to pay for that stock. The faster it earns (lower PE) the better the value. But it is only one metric. In many growth stocks the PE is not as relevant. So just understand what it is and consider it as one thing to look at but don't pass judgement based on that.
Hi @NewbieStocky and welcome in your example >> because with a the EPS at 2$ it bring the P/E price down therefore cheaper to but that stocks (P/E100/2$ EPS =50) for a scalper I am a bit rusty on "all that jazz" (I stop using all those formulas)
so for 50$ I win 2$ but for 100$ I win 1$ Therefore I pay cheaper to win more? edit: In this example, which in real life I guess the EPS would be higher or I can even lose?
Lower P/E = more profitable company. Over time that adds up. For $100 you can buy a company earning $2 profit (50 P/E) or another one making $1 profit (100 P/E). All other things equal (e.g. dividend yield, rate of growth, amount of debt, etc.), you most likely want to buy into the company making higher profit. Whether you win or lose depends on chance, and how long you stay in. The longer you can stay in, the higher your chance of winning.
Oh I get it! Also I started learning some formulas for the RoA and EBIT. I know how to do it but in a simple explanation. How I understand it is that RoA and EBIT are forms of explanation for how much a compagny can earns a year but is it relevant on the price share?
