What is P/E-Ratio?
Price per Share ÷ Earnings per Share
( or: Market Cap ÷ Net Income )
The Price/Earnings-Ratio (P/E-Ratio) tells the investor how many years it would take the company to earn his/her investment at the current share price.
Example: Company XZY trades at 20 EUR and earned 1 EUR per share this year. At the current level and if earnings remain stable, it would take 10 years to earn the amount of your investment. Problem: Company earnings are very volatile and are highly unlikely to be stable over the course of ten years.