Pros and cons of using the price-to-earnings ratio
Pros of using the P/E ratio
By measuring a company’s price to earnings, investors can determine whether shares are over- or undervalued, and decide which stocks to buy. For the company itself, the P/E ratio is a useful indicator of how much confidence investors have in the business.
Cons of using the P/E ratio
Using the P/E ratio as a measure of a company’s stock value has its limitations and should not be used as a single indicator of a company’s value. A price-to-earnings ratio doesn’t mean much until you compare it to the rest of the stocks in the same sector, or other companies listed on the same index.