# What is the price earnings ratio of stocks? Why can it help us judge the value of stocks?

There are many investment terms in the stock market, if investors do not understand the meaning, it is basically difficult to trade. Among them, the P / E ratio is a relatively difficult term for novices. What is the P / E ratio of stocks? Why can senior investors judge the value of stocks by P / E ratio? Today, I'll give you an answer

**1. What is the price earnings ratio?**

In fact, stock P / E ratio is an index used to measure the investment value of stocks when we need to compare whether stocks with different prices are overvalued or undervalued. To be exact, P / E ratio is the ratio of stock price to tax earnings per share in an inspection period. The usual formula is: P / E ratio of stock = market price per share of common stock ／ annual earnings per share of common stock.

For example, if the market price of a stock is 20 yuan, and the tax earnings per share in the past year is 5 yuan, then the P / E ratio of the stock is 20 △ 5 = 4, that is, the stock has a P / E ratio of 4 times, and you can get a profit of 1 yuan when you pay 4 yuan.

**2. What's the use of P / E ratio?**

Generally speaking, P / E ratio is used to measure the investment value of similar stocks. If the P / E ratio of a stock is lower, then it is more worthwhile to invest. However, because the P / E ratios of stocks in different industries, countries and time periods are often different, it is better not to make a simple and crude analogy.

In addition, the P / E ratio has a certain reference value in measuring the value of a company's stock. Generally speaking, the value level of a company's share price can be measured by P / E ratio

0-13: value is underestimated; 14-20: normal level; 21-28: value is overvalued; 28+: reflecting the speculative bubble in the stock market;

However, the P / E ratio is not 100% accurate for the company's stock value. If the price earnings ratio of a company's stock is too high, the price of the stock is bubble and its value is overvalued. But if the company's rapid growth and future performance growth is very optimistic, the current high P / E ratio of the stock may accurately estimate the value of the company.

[disclaimer] the publication of this article by finance managers for the purpose of transmitting more information does not mean that they agree with their views or confirm their descriptions. The content of this article is for reference only, and does not constitute an investment proposal. Investors operate on this basis at their own risk