How do you calculate P/E ratio for beginners? Worth using?
I've been trying to learn about stock valuation and I keep seeing P/E ratio mentioned a lot. But how to actually use it properly?
I know it's "price divided by earnings" but:
- Which price do you use? Current market price?
- Where do you find reliable earnings numbers?
- What's considered a "good" P/E ratio?
Also wondering if P/E ratio is actually worth focusing on for a beginner like me, or if I should look at other metrics first?
1 Answer
As you mentioned, P/E is just current stock price divided by earnings per share. For the price, use whatever it's trading at today. For earnings, most financial sites show both trailing (last 12 months' actual earnings) and forward (analysts' projections for next year).
There's no universal "good" P/E - it varies by industry. Tech might average 25-30, while utilities might be 12-15. Always compare companies in the same sector. I'm planning to write an article soon showing average P/E ratio for US and UK sectors.
For reliable data, Yahoo Finance or your brokerage platform works fine for basic research. If you want to dig deeper, check the company's quarterly reports.
Honestly, P/E alone isn't enough. It's misleading for growth stocks or companies with temporary earnings issues. As a beginner, also look at:
PEG ratio (P/E divided by growth rate)
Debt levels
Revenue growth
Free cash flow
P/E is a good starting point, but it's just one piece of the puzzle.