Question

Why is the price-earnings ratio seen as a critical piece of data for managers and investors? What actions could a manager take to try to positively impact the price-earnings ratio?

Answer 1

It is companies stock price to earning per share.

It can help us to understand whether the stock is overvalued or under valued

Managers and investors can decide whether to invest in particular company with the help of price earning ratio. Price - earnings also helps the investor / manager to compare the data with historical years to actually determine whether to go for investment or not.

The manager should always calculate earning per share before investing in any company. If he / she is looking for positive impact he should calculate price earning ratio to take a positive decision.

For example if company X stock price is $100

Company profit for the year is $ 16 million and it number of shares outstanding is 2 million. its earning per share would be 16/2 = $ 8

P/E = $100 / $8 = 12.5

The greater the P/E investor is expecting higher profits in the future compared to low P/E