Simple Valuation Methods

Price-to-Earnings Ratio

The price-to-earnings ratio is a commonly used ratio that measures the value of a company in relation to its earnings. It allows investors to easily compare different investment opportunities.

The P/E ratio is calculated by dividing the market capitalization of a company by its earnings. For instance, a company with a market cap of $1m and earnings of $200k, would have a P/E ratio of 5.

The P/E ratio essentially tells you how much you will pay for a stock, in relation to $1 of earnings. Therefore, if a stock has a P/E ratio of 5, it means that you are paying $5 for every $1 currently earned.

Traditionally, a high P/E ratio (above 20) is considered to be an attractive investment as it is expected that the company will grow a lot in the future, while a low P/E ratio suggests the opposite.

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