P/E ratio: the key to playing in the Stock Market?

I have just finished reading MMM’s “How to tell when the Stock Market is on sale” article.

It describes very simply what a P/E (price to earnings) ratio is, then applies some basic maths and broad logic to come up to the conclusion that if a stock has a lower P/E than the historical average of 16.4, then it is underpriced. Or, for would-be investors, it is a good buy. [Note: this is for the US, not Australia.]

P/E Ratio = Share Price/Earnings per Share

If you have no idea what any of this means like I did not half an hour ago, do yourself a favour and start by reading MMM’s article. It is a basic explanation that does the job of explaining what a P/E is and how one might apply its knowledge to the stock market. Obviously, do a lot more research before taking this simplified advice. This is only meant to be an introductory lesson to this world, after all.

Intrigued, I did a basic google on “P/E ratio ASX”. Look at what the results gave me:

This of course resulted in me opening an extra 5 tabs up to see what this all means. If you’ve read one of my articles in the past week, you can understand where my morning might disappear now.

Reading through these initial results, I have already learned that there’s much more to understand beyond, and behind, what these P/E ratios mean. There is much more to be learnt in this area, and I am glad I am starting now. Better late than never, right?


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