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 1.000.000 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 so basically it 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 the shares can be inflated by hope or future expectations, this has nothing to do with actual figures on which we can make proper decisions. If we look at the example the previous chapter, with an EPS of 0,16 and let’s say the share has a price of 4,00 the P/E in this case is 25.
Click on the video below to learn about Price-earning