P/E Ratio above or below average

  • Hello,

    If a instrument with P/E ratio above/below average, what is that indicate?

    Let say, 10 year historical average. Below it means bullish and above it means bearish?

    Thank you
  • Hey Jhtan,

    By itself it doesn't tell you whether it's bullish or bearish, but if the P/E ratio is above average it means that people are currently paying more per share in terms of the company's earnings than historically. This could right now e.g. be because of the accommodative central bank politics, i.e. the central banks print money, and therefore people pay more for a company's shares even though the profitability hasn't improved or it could be because people are bullish on the company and expect accelerating growth moving forward so they are fine with paying a higher price as they expect more profit in the future.

    So it just tells you something about how much people perceive the market environment and the company's future growth.

    Was that helpful?
  • Hello Sebastian,

    Yes, it is helpful.
    I believe some investors use P/E ratio to determine a share is overpriced or underpriced.
    Anyway, thanks.
  • Yes, they do. I just meant that it's not very clever to do so without taking into account the larger picture.

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