Should You Buy a Stock With a Low P-E Ratio?
P/E ratio is an acronym for Price earnings ratio. This is an indicator of value. Stated simply, it means the price that a willing buyer will pay for a stock, calculated at the number of times its earnings.Let me illustrate this by an example. Assume Citigroup -the largest bank in the country earns $2 per share this year. If the stock is quoted at $20, the P/E is 10.This means an investor is willing to pay 10 times its earnings per share to buy that stock. This number by itself is not as significant as in relative terms. Always look at the industry P/E . In this case a composite P/E for all banks. This might be 15.So, Citigroup shares that has a P/E of 10 is relatively undervalued with respect to the overall industry that has a P/E of 20. This might look like it is undervalued and a good buy. Never conclude that because the P/E ratio is low, it is a bargain buy. When a profitable company heads for losses – for instance, last three quarters the price of Citigroup has been low, and hence
