The price earnings or P/E ratio allows you to make a very simple and basic evaluation of the quality of your investment. So if we can buy a company with a value of approximately 1 million and the company generates 100.000 per annum then we can conclude that it takes 10 years to recuperate your investments. In this case we have a price earnings of 10.
Now a practical example, Tesla (25/03/2021) has a P/E of 1600. This means that it would take you, as an investor, more than 1600 years to recuperate your investment. This tells us that sometimes the price of shares can be inflated by hope or future expectations.
This has nothing to do with actual figures on which we can make proper decisions. Let’s look at the example of the previous chapter; With an EPS of 0.17 let’s say the share has a price of 4.00, the P/E, in this case, is 25.