The power of the price-earnings ratio
The price-earnings ratio ultimately describes the number of years in which the company would have earned its stock market value with constant profits. In the case of our company X, the invested capital would be earned in 20 years. Furthermore, the P/E ratio can serve as an indication of whether the value of a share is more expensive or cheap for you as an investor.
The common and relevant sites give a guide value between 12 and 15 for the interpretation of the P/E, with which your results can be measured. If your result is below this value, a share is generally rated as cheap, if your result is above 15, the share can tend to be viewed as more expensive. However, it is important for you as an investor to know that these figures are only indicative and it is no concrete standard for interpretation of the price-earnings ratio. In principle, the P/E ratio should never be used alone to value a share. Rather, other economic factors, such as a company’s balance sheet, should also be examined. Because the PER only represents an actual number that can hardly make any statements about the future development of a company.
Tip: It can therefore also be helpful for you as an investor to take a close look at the current and future developments in an industry in order to be able to draw conclusions about the individual stocks and companies.