What Is A Fair PE Ratio To Pay For A Stock?
By The Smart Investor  •  November 22, 2022
One of the trickiest elements of investing is finding out how much to pay for a stock. To make things simple, investors often divide the current stock price of a company by its earnings-per-share to gauge how expensive or how cheap the company’s shares are. This is known as the price-to-earnings, or PE, ratio. For instance, a company that is earning $1 a share and trades at $20 a share has a PE ratio of 20. Another company that is earning $1 a share and trades at $10 a share has a PE ratio of 10. On the surface, the latter company seems cheaper. But that’s not always the case. Other factors such as growth rates, reliability of earnings, and durability of growth come into play. With many variables influencing stock valuation, here’s a simple framework that helps me gauge what is the right PE ratio to pay for a stock. The DCF method...
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By The Smart Investor
The Smart Investor is co-founded by David Kuo, Joanna Sng, and Chin Hui Leong. The company was formed in late 2019 from the ashes of the Motley Fool Singapore. The Smart Investor believes that everybody can learn how to invest, smartly. We aim to educate people on how to invest smartly by providing investing education, stock commentary and market coverage for Singapore and around the world.

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