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This is because the price earnings ratio is showing how much investors are willing to pay for every single dollar of earnings. When the ratio is high, this is saying that investors value the stock very highly and are comfortable paying more money for a certain amount of earnings.
So if Stock A has a P/E ratio higher than Stock B we know that company is more expensive and therefore we can often assume that investors place more value on the growth prospects of that company.
Where this really helps out is when there is misalignment. Often companies P/E's will skew away from their own historical average or away from their peers. During these periods of deviation we can try to assess why this is happening and if this new valuation is unwarranted.
If it is unwarranted this may be a good buying opportunity!
This is just one of the many ways we use P/E! If you want to learn more on P/E and other important metrics, check it out: here
So if you were wondering, "what is p e ratio, what is price to earnings ratio or what is the p/e ratio meaning?", we hope this was helpful. This is pe ratio explained the Moby way.
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