P/E Ratio

(Price to Earnings Ratio)
A P/E ratio is a ratio of how a company’s Market Cap to their NPAT. For example, a company with a MC of $100M, and NPAT of $5M would have a PE ratio of 20. This ratio is often used as a guide for how expensive or cheap a company’s share price is. The average PE for ASX listed companies is around 15 – 16 x earnings. For a company with a PE ratio of 80, a wise investor would start asking questions about why the market is willing to pay such a high premium to own shares in the company. Conversely, for a company with a PE ratio of 5, a wise investor might ask why the market refuses to pay more for the company’s earnings (is it cheap…. or cheap for a reason?)

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