Price to Earnings Ratio

The price to earnings (P/E) ratio – one of the most highly sought after ratios in the world of investment.

The P/E ratio is the stock price/earnings per share. If the stock price is $10.00, and the earnings per share is $2.50, then the P/E ratio is $10.00/$2.50 = 4.

Typically, companies in higher growth industries will have higher P/E ratios, and companies in lower growth industries will have lower P/E ratios.

Some investors argue that a lower P/E ratio indicates that the investor is getting more value for their investment dollars, and other investors suggest that higher P/E ratios indicate greater potential for gains on their investment dollars.

For these reasons, I compare P/E ratios between companies in the same industry (and all ratios for that matter, thus the approach of comparing all data between the five big Canadian banks).

For more information about P/E ratios, Motley Fool and Investopedia have more information:

http://www.fool.com/investing/value/2006/08/29/how-to-use-the-pe-ratio.aspx

http://www.investopedia.com/terms/p/price-earningsratio.asp

As an aside, it'll be interesting to observe the impact that today's news about Canada's 5% GDP growth in the fourth quarter of 2009 will have on the five big banks, if any. When I hear news like this, I ask (and find the answers to) questions like – what does economic growth mean for interest rates? What impact does that have on the profitability of banks? What will the next media headline be for the company that I am invested in or considering investing in? What will that mean for the stock price next week, next month?