I'm trying to understand how markets work, and the price earnings (P/E) ratio is very confusing to me. It's explained to me that it is simply the cost you pay to own $1 of the company's earnings. This makes sense, when you apply the formula Price per Share / Earnings per Share, you can simplify to Price/Earnings. I understand where that statement comes from. What I do not understand is what intuition that statement is supposed to provide. I'd go as far as to say I understand why this is useful. A higher than usual P/E means investors are bullish, or the company's earnings are low. A low P/E means investors are bearish, or the company's earnings are high.
I think about markets as investments, you buy a share you think will be worth more later on, and you sell it if you think it will be worth less. What is the value in saying: "you are paying to own $1 of earnings". That's a statement that, yes, explains what is happening, but only serves to confuse me.
So, I ask you, why would I pay $15 to own $1 of earnings?
Submitted January 15, 2017 at 12:02AM by bg93 http://ift.tt/2jlNX1d
