What is a good P/E ratio? Formula and context

UXS video · Stocks · 0:44 · Published

UXS video · synthetic voice · Mixkit music · MP4, 3.8 MB

What this video covers

How the P/E ratio is calculated with the page’s $100 price and $5 earnings example, and why the same number can mean value or trouble. What to compare it with before drawing conclusions.

Sources and the longer explanation: What Is a Good P/E Ratio for a Stock?.

Numbers shown on screen

  • 20 years: of unchanged profit to equal the price

How the visuals were made

In 0:44 the video moves through 7 scenes, including a worked formula card (P/E = share price ÷ earnings per share); a side-by-side comparison of Low P/E and High P/E; a checklist, “Compare it with”; a side-by-side comparison of Trailing P/E and Forward P/E. All graphics were rendered frame by frame by UXS; no stock footage, logos or faces are used.

Chapters

  • 0:00 What is a good P/E ratio?
  • 0:04 Price-to-earnings ratio
  • 0:12
  • 0:17 Compare it with
  • 0:23 of unchanged profit to equal the price
  • 0:32
  • 0:40 Risk note

Transcript

What's a good P/E ratio? There is no universal answer.

It is share price divided by earnings per share. A $100 stock earning $5 a share has a P/E of 20.

A low P/E can signal value or trouble. A high one can signal growth or hype.

Compare it with the company's history, its sector and its growth. With negative or tiny earnings, it is meaningless.

A P/E of 20 means paying 20 times current annual earnings. If earnings never changed, it would take 20 years of profit to equal the price.

Trailing P/E uses the last 12 months of reported earnings. Forward P/E uses analyst estimates, which can be wrong.

Educational only, not financial advice.