Why would P/E ratio increase if stock price decreases?

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  • 6 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.

    • Nick6 months agoReport

      I don't think this is correct

  • 6 months ago

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  • 6 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.

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    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.

  • 6 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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  • Never
    Lv 7
    6 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.

  • 6 months ago

    Because earnings decreased more than the stock price.

  • Anonymous
    6 months ago

    Not if earnings stay the same.

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