What is a good price-to-earnings ratio?
Well, let's go over what that is and how it's calculated first.
Take a company's expected earnings for the next year. Then take the market capitalization (the market equity value of the company). Divide the market cap by the expected forward one year earnings number. That gives you the price-to-earnings ratio, or the earnings multiple.
You'll notice it'll be quite a multiple. A low P/E ratio, for example, would be 10. So how does a company have $100 of expected earnings and a market value of $1,000? It's based on future cash flows for the next 6 to 10 years.
If you still have questions, don't worry, we break it down even further in our 60 Seconds (or so) special series above.
Ready to Retire: The Biggest Threat to Your Retirement? Check Your Basement
Ask the Expert: Cannabis One CEO Believes Now Is the Time to Invest in Cannabis
TheStreet Feature: Here's Something Investors May Be Missing About the Drone Revolution
Catch Up: Today's Top News Videos Below