PE ratio is arguably the most commonly used financial metric in share investment. But many investors may not truly grasp the idea of PE and how can it be applied to shares investing.
In this article, I try to explain PE ratio using simple language, and highlight how it can be used in your daily investing decisions.
PE Ratio – The Concept
Imagine this. You have a sum on hand, and is prepared to acquire a food stall in the neighbourhood as an investment. As you approach the business owner, what would be your first question to ask?
Surely, one of the first few questions you would post is ‘How is your business?’. That’s in layman term. Essentially, you are asking ‘How much does your food stall earn?’. The owner would probably reply ‘Well, last year we earned $100k per year’, or ‘For the past 6 months, we …