A Simple Explanation of the PE Ratio

Neil Irwin provided a very effective and simple definition of the price-earnings ratio in a recent NYT article encouraging investors to think logically about investing in the long term. The definition provided follows:

“Typically, stock analysts think of valuations in terms of the price-earnings ratio, but it can be clarifying to invert it. So, for example, at the record market high on Feb. 19, this earnings-price ratio was 3.1 percent for the S&P 500, meaning that every $100 invested in an S&P index fund bought interests in companies that accounted for $3.10 in profits over the previous year.”

Click on the link below for an article that uses this definition to help readers think about how to approach a falling market.

education pe ratio
Source: Neil Irwin | "How to Stop Worrying and Love a Falling Stock Market" | The New York Times | 03/13/2020 | Visit