Price To Earnings Ratio - How Does It Affect Your Bottom Line?

When it comes to investing in the stock market, one measurement stands out above the rest; how much did the investor earn at the bottom line and in turn, how does that earning compare to the price. Traders use many tools to help determine their stock trading plan, but the most common tool for assisting an investor is price to earnings ratio, or P/E ratio. Price to earnings ratio is an example of stock fundamental analysis; this is the method of examining businesses at the most essential levels. This process of review evaluates many key ratios of a business to attempt to determine the stability and financial health of a company and to determine the value of its stock.

It is safe to say that the number one ratio investors cite when discussing fundamental analysis is price to earnings ratio. This number is raised aloft like it possesses an authority above all others. It is, in fact, only one of many examples of fundamental analysis that successful traders should use before implementing trades. The price to earnings ratio evaluates the relationship between the price of a stock and the company’s earnings; it is the most widely used metric in fundamental analysis but far from being the only one that a trader should use. When reviewing the price to earnings ratio, it is wise for the investor to consider other ratios as well as using a stock trading system to search for the most complete information on a stock and its trends.

Simply put, to calculate price to earnings ratio, divide the share price by the company’s earnings per share (EPS). For example, if a company has a share price of $50 and an EPS of 10, the price to earnings ratio is 5. While a higher P/E ratio is generally considered a good thing, to some investors it signals an overpriced stock. It is very important that the trader views the P/E ratio only as a stock market trading tool to help draw an overall conclusion. Using a method such as candlestick analysis, an investor is better able to understand the dynamics of a stock before deciding to purchase or not.

So what does the price to earnings ratio tell the investor? It gives an idea of what the stock market is willing to pay for a company’s earnings. While it is generally accepted that a high P/E ratio is favorable and a low P/E ratio isn’t, even that conclusion isn’t accepted by all investors; therefore, it is wise to view the price to earnings ratio as a tool for helping to identify a potential stock purchase. When used with a stock investing system and other analysis ratios, it can help the investor to determine the best stock market investing strategy possible.

As always, the ultimate number an investor can analyze is his or her bottom line. Does the investor consistently make money investing in stock? Have the principles contained in the stock trading plan been successful? Success in the market depends on making good judgments and making good judgments depends on using good fundamental and technical analysis tools and practices. The price to earnings ratio is one of the tools that can help lead a trader down the road to successful trading and investing.

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Market Direction: The Bullish Harami/Spinning Top, formed on Friday in the Dow, revealed significant information. After the Dow came down and touched the 20 day moving average, it formed a bullish signal. The Bullish Harami indicated that the selling had stopped. The fact the Dow bounced off the 20 day moving average gave more evidence the 20 day moving average was going to act as a support level. Could it have been analyzed that the balance off the 20 day moving average be acting as support without candlestick signals? Obviously yes, however the information provided by the candlestick signals makes the analysis easier to evaluate.

Investors not using candlestick analysis would have the prospect of the Dow supported on the 20 day moving average. Using the typical bar chart, those investors would usually have to wait for confirmation. The candlestick signal formed on the same day that prices just touch the 20 day moving average produces much more immediate information. The bullish harami also revealed that the selling had stopped. This information, combined with the bounce off the 20 day moving average, made for the opportunity to start investing in bullish positions without the two or three day delay the other technical investors would require. The candlestick investor knows immediately what should occur after a bullish harami. Positive trading, when that occurs, the candlestick investor would already have been prepared for placing long positions.

DOW

Being prepared for what should happen after particular candlestick signals makes participating in high profit situations occur with a much greater percentage probability. As illustrated in the New River Pharmaceuticals Inc. chart, a strong bullish day after a series of Doji's provide the setup for a strong trend move. This is not potluck! Understanding what occurred to the investor sentiment after a series of indecisive trading days permits an investor to be in the right place at the right time.

NRPH

Being able to time a trade creates huge advantages for putting on successful option trades. When the signals reveal that the price is moving, option strategies become highly successful.

The analysis of fundamentals does not mean much if a stock price does not have favorable investment sentiment. Most investors are taught to find companies with strong fundamentals. Many companies have strong fundamentals. However, it is the future potential of the fundamentals that will move a stock price. Learning how to use candlestick analysis is much more powerful for projecting future price moves. Reading "Profitable Candlestick Trading" and "High Profit Candlestick Patterns" are two books that have completely altered many investors' perceptions. Use the holiday season as an opportunity to provide young investors with investment education that they will be able to use for the rest of their life. Click here for holiday specials

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Good Investing,

The Candlestick Forum Staff