How to Value Shares (5)

P/E ratio (2)


Since there is a lot of variation in the dividends paid by companies over the years,

it can be argued that P/E ratios do not provide very accurate pay-back information.


It does, however, provide a fairly accurate view of the growth potential of the share.

It portrays the extent to which the market is optimistic about the stock, and its expectation of the share’s future growth.

A P/E ratio of 1 means the share is seen with a lot pessimism, whereas a figure of 20 means the share is looked at favourably by investors.

Recent research has, nevertheless, shown that shares with low P/E ratios outperform those with high ones.

It is perhaps wise to take the middle road, and avoid shares with very low or extremely high P/E ratios.



By David Opoku