How useful is the P/E ratio in assessing ASX shares?

The price-to-earnings (P/E) ratio is one of the most oft-quoted statistics in the world of investing, usually coming after an ASX share’s price, and perhaps its market capitalisation.

This is justified to an extent – the P/E ratio can be a very useful metric to examine when you’re deciding whether to invest in a particular company. But it can also be misleading. So let’s look at some ways to use the P/E ratio, and when you shouldn’t.

P/E ratios: An introduction

So let’s first examine exactly what the P/E ratio tells us. The ratio represents the relationship between a company’s annual earnings, measured by its earnings per share (EPS), to its market capitalisation, measured by the share price. A company with a high P/E…