Prajna Capital - An Investment Guide

This article explains what this ratio is all about and how it can be used to judge if a stock is trading at a fair value The term price earning ratio ( P/E ratio ) is commonly used while making investment decisions by investors. Investors rely on this ratio to base their investment decisions in equities. Simply stated, a P/E ratio is the ratio between the market price of the share and the earning per share ( EPS ). The ratio tells you how many times the market price of the shares is vis-à-vis its earning per share. According to one view, lower the P/E ratio, the better it is for the investors, as there are chances of appreciation. And vice versa, i.e., higher the ratio, lesser are the chances of appreciation. Moreover, the risk element also increases. According to others, it is the other way round. P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings. It is calculated as market value per share divided by earnings per share. Fo...