Define the price and earning ratio valuation method, Financial Management

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Define the P/E valuation method. Under what circumstances should a stock be valued using this method?

The P/E ratio points out how much investor are willing to pay for each dollar of a stock's earnings.  A high P/E ratio points out that investors believe the stock's earnings will raise, or that the risk of the stock is low, or both.

Financial analysts frequently make use of a P/E model to estimate common stock value for businesses which are not public. First, analysts evaluate the P/E ratios of identical companies within an industry to define a suitable P/E ratio for companies in that industry.  Second, analysts calculate a suitable stock price for firms in the industry through multiplying each firm's earnings per share abbreviated as EPS by the industry average P/E ratio.


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