What does the PE Ratio or Price Earning Ratio signify ?
1. How much investors are willing to pay per rupee earnings of a company
2. Current market value of a company
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The price earnings ratio, or the PE multiple, is a valuation measure that indicates how much investors are willing to pay per rupee of the earnings of a company. The PE ratio of a company is calculated by dividing the current market price of a company share by its earnings per share.
The PE ratio is a much better indicator of the value of a stock than its market price. All things being equal, a Rs. 10 stock with a PE of 30 is much more expensive than a Rs. 100 stock with a PE of 20. The PE of a company must be compared with others in the same sector or the industry average. It is futile, for instance, to compare the PE of a services company with that of a manufacturing firm. Investors will often find that the companies with good earnings track record and stable finances also have a high PE.
This question is a part of GKToday's Integrated IAS General Studies Module