Q&A: Does A Low Price-To-Earnings Ratio Make A Stock A Bargain?

Q&A: Does A Low Price-To-Earnings Ratio Make A Stock A Bargain?
Carl Hazeley

about 3 years ago1 min

Question from Elleisha: Does a low price-to-earnings ratio make a stock a bargain and a high ratio mean a company’s unprofitable?

Answer from lead analyst Carl: It’s not quite that straightforward unfortunately, Elleisha. Price-to earnings – or P/E – ratios  don’t tell you why a stock has the ratio it does. For example, automaker Ford currently has a P/E ratio of 7.4, while General Motors’ is 8.6. That might suggest that Ford’s undervalued and should have a higher share price, or it might suggest investors think earnings forecasts for the company look too high (all else equal, lower earnings per share means a higher P/E). Similarly, a relatively high P/E could either mean a stock is expensive or simply that forecasts look too low. Figuring out which is the case is tricky, but you can get a sense of what might be going on by doing your own research on the company.

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