Why Might a High P/E Ratio Be Attractive to Investors?

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The discussion centers on the interpretation of the Price-to-Earnings (P/E) ratio, which is a key metric in evaluating stock investments. A higher P/E ratio suggests that investors are paying more for each dollar of earnings, indicating a longer time to recoup the investment, which seems unfavorable. Conversely, a lower P/E ratio implies a quicker return on investment, which appears more attractive. However, the reality is more nuanced. A high P/E can reflect investor confidence in future earnings growth, while a low P/E may signal concerns about the sustainability of current earnings. The conversation highlights the importance of understanding market sentiment and future expectations in relation to P/E ratios, rather than viewing them solely as indicators of current financial performance.
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From Wikipedia:

"As an example, if share A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then share A has a P/E ratio of $24/($3/year) = 8 years. Put another way, the purchaser of the share is investing $8 for every dollar of annual earnings; or, if earnings stayed constant it would take 8 years to recoup the share price."

So just strictly based on this definition, a higher P/E would be bad because it would take more years to recoup the share price (or more money for every dollar of annual earnings). Whereas a lower P/E would be good because it takes less time to recoup the share price (or less money for every dollar of annual earnings).

Obviously in reality it is the opposite. So I'm really not understanding what P/E means. Any help would be appreciated thanks.
 
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RChristenk said:
From Wikipedia:

"As an example, if share A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then share A has a P/E ratio of $24/($3/year) = 8 years. Put another way, the purchaser of the share is investing $8 for every dollar of annual earnings; or, if earnings stayed constant it would take 8 years to recoup the share price."

So just strictly based on this definition, a higher P/E would be bad because it would take more years to recoup the share price (or more money for every dollar of annual earnings). Whereas a lower P/E would be good because it takes less time to recoup the share price (or less money for every dollar of annual earnings).

Obviously in reality it is the opposite. So I'm really not understanding what P/E means. Any help would be appreciated thanks.
It is not so totally obvious. The actual question is - what are the other buyers/the share market mistaken about? What are you guessing right that the market is guessing wrong?
If P/E is high but positive, or it is negative, it means that E is small, or actually negative, but P is still high. The share is bringing in little money for now but people are willing to pay high P for it because they hope that E will grow a lot in future (or, less commonly, that E will stay steady and safe for a long time).
If P/E is low, it means that the share is bringing in money now but the share traders are afraid that it will stop bringing in money soon.
 
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