Why would P/E ratio increase if stock price decreases?
- tiescoreLv 68 months ago
Because Math.... P is the price, E is earnings... if the divisor remains unchanged and P declines the ratio: P divided by E increases.
- 9 months ago
- zman492Lv 79 months ago
As you almost undoubtedly understand, it would happen if the earnings dropped by a bigger percentage than the stock price.
Here are a couple of ways that could happen.
(1) A company's manufacturing capability is temporarily reduced due to a disaster, such as a tornado or a flood. That will have a severe impact on quarterly earnings, but little if any impact on the ability of the company make money in the future. So, earnings might drop 50% for a quarter but the stock price might only drop 20%, resulting in an increase in the P/E ratio.
(2) A company has a stock price of $200 and decides to have a 4:1 stock split. Investors in the company generally approve of split, so after the split the stock sells for $60. Earnings per share dropped a full 75%, but the stock price only dropped 70%, so the P/E ratio would increase.
You should also be aware that some researchers publish a an estimate of the future P/E of a company based on their estimates of what will happen in the future, not actual current data.
- SlumlordLv 79 months ago
I'm assuming the earnings stayed the same. The P/E is the ratio of the price to earnings. If the price (P) goes down but earnings (E) stays the same the the P/E ratio will go lower, not higher.
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- NeverLv 79 months ago
$10 stock price, $1 in earnings = pe of 10/
$7 stock price, $1 in earnings= pe of 7.
So it would NOT increase unless earnings decreased.
- MichaelLv 79 months ago
Because earnings decreased more than the stock price.
- Anonymous9 months ago
Not if earnings stay the same.