The P/E ratio (price-to-earnings ratio) is a metric that indicates how many times the current price of a stock is higher than the profit the company earns per share. In other words, it shows how many years it would take for your investment in the stock to pay off based on the company’s current earnings (assuming earnings remain constant).
This ratio is often used as a quick way to assess whether a stock is overvalued, undervalued, or if the market expects rapid growth from the company.
Why P/E value?
In our system, we look for stocks of financially healthy companies that generate consistent profits. Such stocks tend to be more stable and carry a lower risk of sharp price fluctuations. The average P/E value is set as a reference point, and slight deviations above or below it do not automatically disqualify a stock from consideration. However, negative or extremely high P/E values are not suitable for our strategy.
Answers and Score
| ANSWER | SCORE | PRIORITY |
| Very high – unrealistic valuation | 4 | 1,2 |
| High – overvalued | 6 | 1,2 |
| Average – fairly valued | 10 | 1,2 |
| Low – undervalued | 8 | 1,2 |
| Below 0 | 1 | 1,2 |
Where to find volatility values?
You can find the value, for example, on finviz.com.
This question is part of this analyzer.
| Decameron Stock Analyzer – Swing trading, v.1.0 | open analyzer |
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What is P/E (Price-to-Earnings Ratio) and How to Use It in Trading?
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