On this episode of the Finance Flash Go! podcast, we’re talking about stock P/E ratios.
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The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. In short, the P/E shows what the market is willing to pay today for a stock based on its past or future earnings.
A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings.
However, companies that grow faster than average typically have higher P/Es, such as technology companies. A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future.
The average P/E for the S&P 500 has historically ranged from 13 to 15. For example, a company with a current P/E of 25, above the S&P average, trades at 25 times earnings.
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