First, a lot of investors use the P/E (Price to Earnings) Ratio to determine the value of a stock. The P/E can be a useful calculation in finance but it should not be the single reason why you buy or sell a stock.
Here is why the P/E ratio is misleading...
Generally speaking, a high P/E indicates that investors expect higher earnings and therefore the share price will rise. On the other hand, a high P/E ratio can also indicate the stock is overvalued.
On the flip side, when a company's stock has a low P/E, it may indicate that the stock has low earnings and the share price will fall. On the other hand, a low P/E ratio can also indicate the stock is undervalued.
Overall, P/E Ratio can be good or bad, no matter what the number is. That doesn't help you or I. The P/E Ratio does note provide significant confidence on whether to buy or sell a stock.
If you’ve ever seen the movie, Moneyball, it’s like drafting a baseball player because he’s “handsome” or because he has a “good swing.” As you learn in the movie, wins are not based on physical looks or how you swing a baseball bat, it’s based on math. The common denominator with wins is based on how many times you can get on base.
Unfortunately, the P/E Ratio doesn’t have strong enough math. There aren’t enough data points to make a logical decision. The P/E is 2 numbers and 1 calculation. When you keep reading, you’ll learn how TYKR compares.
Equation: Share Price / EPS