How to value a potential investment

When it comes to deciding that you want to make an investment in something then you must weigh up the pros and cons. Sometimes this is easy and you barely notice that you are doing it: for instance when you decide to buy food at the supermarket you are willing to pay the price because you need to eat. Although even then with more expensive items or treats you must assess whether you feel it is worth it or not.

When it comes to stocks and shares, there are various key figures that are provided that will help you make the decision as to whether you think it is a good potential investment or not.

The most commonly referred to statistics is something that is called the PRICE to EARNINGS ration, often written P/E, or simply PE.

This number is one that is calculated quite simply: divide the share price of a company by its earnings per share. This is used as a guide to two important figures for any investor: the perceived worth of the share (not the literal value, of course, which is simply its actual trading price!) and also as a potential indicator of growth prospects.

Generally a higher PE shows that a share is rated more highly by the market. There also tend to be significant differences from one sector to another.

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How to value a potential investment

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