can someone explain to me what a P/E ratio is? thank you
Price to earnings ratio. It is the ratio of the share price to the per-share earnings of a company. I forget what the ratio usually is - was it 16 to 1? - but when it strays far from that, it is often an indication that something is wrong and a correction is on the horizon.
I forget what the ratio usually is - was it 16 to 1?
Wouldn’t this magic number depend on the going interest rate?
It depends on a lot of things. I just meant that 16 to 1 isconsidered what the ratio tends towards through time.
Indeed it does. In an evenly rotating economy the P/E ratio will be the inverse of the interest rate.
I just meant that 16 to 1 isconsidered what the ratio tends towards through time.
My point was, isn’t it like saying that 6.25% is what the interest rate tends towards throgh time? Which presupposes that 6.25% is somehow special and universal.
Never thought I’d see such a reply on this website.
Andris is right. 16 : 1 is also the historcial ratio between gold and silver.
It’s more of a historical observation than an economic law. It’s sort of like saying that whenever Germany began militarization a European war was on the horizon; it doesn’t mean that if Germany began to expand its army today Poland would be invaded in the coming months, just that it’s happened before and could happen again. In the same way, if the P/E ratio falls below 16 to 1 it doesn’t mean that the company willl go out of business, but companies whose shares have trended that way in the past have gone out of business. But it is certainly incorrect to claim that this is anything other than a historical anecdote.