The price-earnings (P/E) ratio can be a useful tool in evaluating your investments. Before you take charge and begin to evaluate your investments, you need to know what it is. The P/E ratio uses earnings per share divided into the current stock price. When a company has a low P/E ratio relative to others in its industry, it may mean that the stock price has not yet come to reflect increased or constant earnings. This also might indicate that the stock price may increase in the future. We believe that looking at this ratio is an easy way to apply the concept of “buying low.” Warren Buffett has made a pretty decent living applying this concept.
The price/earnings-growth (PEG) ratio is another useful tool that can be used to evaluate your investments. As a forward looking ratio, the PEG ratio may prove to be more predictive than the P/E ratio alone. This is because it takes the stock price, earnings per share, and a company’s expected growth rate into account. A lower PEG ratio may signal an opportunity as those companies may be undervalued compared to their growth potential.
In relation to both the P/E and PEG ratio, be sure that you understand their limitations in your decision-making process. While both can be helpful in evaluating your investments, it is always recommended that you consult with your trusted financial professional when making decisions on your overall investment strategy. To download your complimentary investment strategy guide, Click HERE and be sure to schedule your financial review online.