I fully understand the defenition of P/E ratio, but how do I read it in real 
li
life. IBM with P/E = 15; Div = 1.00; last = 75. What does it realy mean?
What if the ratio was higher or lower? Help, please.
                                                Pawel.

16 responses total.

I am a bit perplexed by your question, because I don't want to bore you
with stuff you already know. At 15 the P/E ratio says that the market
is currently valuing the company (IBM) at 15 times its earnings.
Price*NumShares=Market Capitalization (what the Market is valuing the co at)
MarketCap/Total Earnings - P/E ratio

OK so the P/E is an indicator of whether the stock is pricey.
If P/E were higher, the Stock would be more expensive, valued against earnings.

Of course the flaw is that earnings is just one way to value a company. 
It is an indicator, but only that. 

Other indicators are often used...book value, sales, they all have their
flaws.

This would mean, that if a company lost money last year, the PE ratio would
be negative. But I have not seen one yet.
To a friend who sent me a letter: how can I get your address?
Two more questions. If the PE ratio is greater then the price of one share, 
does that mean that the company made more money then it's own worth?
The total earnings in the PE ratio are the earning of the whole company,
?
not the earnings of an individual shareholder. T/F?

When a company loses money, the P/E ration would indeed be negative,
but it is usually quoted as N/A. You may have seen this.

The P/E ratio is not a price, it is a dimensionless ratio, so you cannot
compare it to price to see which is larger. You can think of P/E as 
either (Price of 1 share) divided by (earnings per share) or as the
equivalent ration (Market Cap) divided by (total earnings).

Remember that Market Cap is just price of a share times number of shares.

If P/e ratio were below 1, then you would have the situation that 
the company was valued by the market at less than its current earnings.
You will rarely see this, and when you do you might want to look into the
reason why. Perhaps you are looking at trailing earnings and the company
has been hit with a lawsuit that will force liquidation.

           hmmmmm.  pe ratio. well if you want the truth, it is just a
number.  it doesnt have anything to do with whether your going to loose
or make money with the stock.  as with the dow jones index and all of 
the other indexes, they are something to sell to the public.  the indexes
that are actively traded excepted.  dont be blinded by or brainwashed by
all of the commercials that are bombarding you every day.  there is only
one thing to master.  PRICE ACTION.  that is where the action is.  it is
pretty straight foreward.  it contains all of the information that is 
pertinent to a given stock second by second of every trading day. study
it, chart it, dream about it, treat it like you would your dog and you
will be successful.  play the games that they try to sell you and your
chances of breaking even are about 50/50 unless ypou happen to be
related to hillary:).

 That's a risky strategy, patches.  Unless you've gota couple of million
dollars to invest, trading on technical aspects (moving averages, trend lines
etc.) is inherently riskier than smart investment based on fundamentals (i.e.
P/E raion, dividend yield, earnings &revenue growth, etc.)  Warren Buffet
did not make his gargantuan fortune by watching every uptick and downtick;
he did it by investing in fundamentally sound, and more importantly growing,
companies for the long-term.
 I've been actively investing for four years now, with some success (avg.
annual return: 25-30%) I've done it by INVESTING (as opposed to trading)
in companies with low P/E's (around 10-15), good management, and future 
potential.  The key to successful investing is taking time to learn what's
going on to whom, and why is it happening.  Be prepared to spend a couple 
of months of research i.e. watching the news, reading the paper, talking
to people, not spending 8 hours a day looking at Value Line)  Remember -
it's hard to lose money in long-term investing

I agree with Dennis. P/E ratios are numbers, it's true. They certainly don't
tell the whole story. But they help identify good long-term values.
Trading on technicals is a sucker's game.

 How many TRADERS do you know of that have made it big?  George Soros, 
maybe, and he's not even a household name.  In the "Investor" list, you've
got Buffet, Peter Lynch, and just about every successful long-term money 
manager.  Often times it may be smart to bet against the crowd, but not here.

Michael Milken comes to mind...

        i appreciate your doubts as to trading versus investing, but i can
        assure you that the boys that your buying your stocks from are
        traders.  if they were investors  they would have folded long ago.
        dennis, you mentioned the fact that they hardly loose, <investors> and
that is
        partially true, but the other side of the coin is that they seldom make
it big.  how many years do you want to wait to begin to show a profit??

as for myself, i read nothing, watch no stockmarket programs and try not
to isten to any propraganda that might influence the reading of a chart.
it is very important to be objective to make money.  also when you fall
in love with a stock, that is the absolute end as far as making money is 
concerned.

yesterday i bought prx for 7 1/8 plus 12.50 commission. i bot 5000 shares
but would make the same percentages of profit if i had just bot 1000 shares.
i am looking for this stock to go to 14 or more sometime in the future. 
that would nearly double my money if i waited. however, rather than the
7.00 i hope to make  i will probably make 15.00 plus for a few minutes
additional
work 5 days a week.  that will net me somewhere in the neighborhood of
75,000.00 in the next ? months.  not bad for a 35,00.00 investment.  as
for the fundamentals, they have changed several times over the past 20 years
but the price has always told you when too buy and sell.  btw, did this
same thing with many other stocks.  this kind if action is only available
thru charts.  insider trading excepted heheheh.

so far this year weve had 2 winners.  dna bot at 29.25 and sold at 104.75.
mu bot at 36 and out at 90.  normally i have 1 stock a year that has a good
run
the rest just double in value.  pretty hard for fundamentals to tell you when
this is going to happen:).

forget the big money.  this is kinda like playing the slots.  if you stay long
enough the big money will come.  in the meantime you can take 6 months
vacations andeat steak and drive a new car every so often and in my case hang
out at the beach and the gym as much as you want.:)

good investing guys..........patches.

 I will have to agree with you on one point, patches.  Stocks sometimmes do
fall into a long-term trading range.  I had a friend who bought Boeing every
time it got to 35 and sold every timme it got in the 50's or 60's.  I've seen
nuerous examples of stocks doing that, following some pattern.

 However, I come from a different school of thought.  I believe that it's best
to trust the balance sheet rather than the trend lines.  And, like you, I have
had several substantial winners.  I bought Am.Sav. of Fla. a couple of years
ago when it was selling for 1/4 and had a P/E of 1.  You know why I bought
it?  A lot of the probles it had with bad loans were behind it, management
had taken a new agrssive stance at reducing goodwill, increasing business,
expandingf, and reducing its bad debt.  And you know what?  Within two years,
it was selling for over 5 (adjusted for a 1-5 reverse split) and I was sitting
pretty.

 Take Intel.  Before the recent high-tech rally began, it wa selling fo rabout
60 and at a P/E of 14.  It was a market leader, had good products in
development, and deserved a higher market multiple than the one it was
receiving from the market.  Guess what?  Based on fundamental strength and
money pouring into high-tech's, it doubled in a manner of months.  The same
was true of several other stocks in that sector.  People began t realize the
actual value of the businesses, leading to the run-up.

 I'll tell you what.  You can stick to your charts and steak dinners.  I'M
gonna keep on doing what I've been doing -  investing by the book.

This item has been linked from finance 14 to Intro 47.
Type "join finance" at the Ok: prompt for discussion
of money matters.

        soounds like your doing ok.  but how do you do  when the market
is flat??  for myself, i cant take those long dry spells.  the kids begin
to holler after a few weeks of bread abd water.

as for the intels of the world, they all went up and split except 1 that
i follow.  that being lsi.  would be agood one to wtch later down the road.
i understand their fundamentals are very good.  of course you have to
know when to get out and that takes a chart.

looks like prx is  going to pull back a wee bit in here so we sold some
friday for a profit and went short 5000 @ 7.25.  more later.

Re 12:  "Flat market" as you very well know, refers to the average of all
stocks traded on the NYSE, NASDAQ, etc.  However, one can always find stocks
that are moving up ina flat, or even bear, market.  And then, of course,
thereare always some "bargain buys" after a good market shakedown.

LSI is a pretty good company, and I also think that they could use a split.

As for the kids, let them eat bread and water during the dry spells.  Like
my dad always said, it builds character.

We've had an interesting market since Greenspan made his comments about
"exuberance". I hope you were all wearing seat belts.

Um, it hasn't been that bumpy, percentage-wise.

hmmm...interesting.

in resp#9 the user patches said he bought 5000 shares of PRX for 7.125 

May 1996  5000 x 7.125 = $ 35,625
Feb 2004  5000 x 59.47 = $297,350 (%834.6 gain)

an annual avg return of approx %104.3 if he had held that stock till 
now.

$297350 - $35625 = $261,725 x %.15 = $39,258.75 (uncle sams cut).

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