PE Ratio - price/earnings ratio (P/E ratio) explained
The share price is put in relation to the profits. In this way, it is possible to identify undervalued companies whose price is ideally cheap while their profits are high. The price-earnings ratio is also called the PE ratio or price-earnings ratio.
Value investors in particular use mathematical formulas such as these to analyse a company according to its substantial value. This is to ensure that a purchase of shares is not only based on a trend. After all, a trend may not correspond to real economic conditions. A high share price with https://trade-exness.com/mt4/ primarily represents the hopes of shareholders. However, it says nothing about the profitability of a company, which is why there are constant price fluctuations, for example when shareholders have been deceived.
The higher the share price and the smaller the profit margin of a company, the greater the final result of the PE ratio in the calculation. A high figure thus reflects an overvalued share that is trading at high prices on the stock market, despite relatively low profit income. Investors should tend to look for a small value in order to find profitable companies that are undervalued on the stock market.
In addition, scepticism can also be responsible for low stock market prices because of new and uncertain products. The price-earnings ratio can be used to compare listed companies in an industry. In a way, the PE ratio stands for the price-performance ratio of a share. Shareholders should nevertheless critically scrutinise values because a low value of the PE ratio is not a blanket indicator for a purchase.
Brief facts about the PE ratio
- PE Ratio is the English name for price-earnings ratio.
- Important indicator of potential profit margin
- Price in relation to profits
- Find overvalued and undervalued stocks
P/E ratio - Important company ratios to determine
Due to the disclosure obligation for listed companies, important company ratios can be viewed via the reports. Company reports for shareholders are fundamentally reliable as a result of the strict legal regulations that make it a punishable offence to conceal important events. The publications are checked by Bafin for plausibility and the like.
This is the Federal Financial Supervisory Authority. So-called ad-hoc news must also be reported to Bafin before the latter is published. A company must report negative trends transparently and reliably to shareholders.
Quarterly reports can be used to view the current profits of companies. However, this is not mandatory for all companies on the German stock exchange. Only companies that are in the Prime Standard have to make the quarterly reports publicly available. These can usually be found on the company's website.
Shareholders can find essential company ratios that they can use for calculation purposes. The informative value of a formula ultimately depends on the numerical values used for the calculation. Only in this way can the profitability and the current economic situation of a company be mathematically fathomed under real conditions.