P/E of 10

A P/E of 10 is a specific value for the Price-to-Earnings Ratio (P/E), one of the most popular metrics in an investor's toolkit. At its core, the P/E ratio tells you how much you're paying for one dollar of a company's profit. You calculate it by dividing the current Share Price by the Earnings Per Share (EPS). So, a P/E of 10 literally means you are paying $10 for every $1 of the company's annual Net Income. In the world of Value Investing, a P/E of 10 has long been a classic benchmark, signaling that a stock might be trading at a discount to its intrinsic value. Think of it as finding a quality item on a sale rack—it’s not a guaranteed bargain, but it’s definitely worth a closer look. This simple number can be a powerful first filter to hunt for potentially undervalued companies in the Stock Market.

Why all the fuss about the number 10? The reverence for a low P/E ratio, and 10 in particular, comes straight from the father of value investing, Benjamin Graham. He championed buying stocks with a significant Margin of Safety, and a low P/E was a primary indicator of this. A P/E of 10 offers a beautifully simple way to think about your potential Return on Investment (ROI). If you flip the P/E ratio upside down (E/P), you get the Earnings Yield.

• Formula: Earnings Yield = Earnings Per Share / Share Price = 1 / P/E Ratio

For a stock with a P/E of 10, the earnings yield is 1 / 10, or 10%. This means that for every $100 you invest, the company is generating $10 in earnings. In a world where government bonds might yield 3-5%, a 10% earnings yield looks incredibly attractive, assuming those earnings are stable and sustainable. It provides a quick, back-of-the-napkin way to compare a stock's potential return to other asset classes.

A low P/E can be a flashing green light, but it can also be a warning sign. Before you jump in, you must understand the common traps associated with a seemingly cheap stock. A P/E of 10 might be a sign of a wonderful company on sale, or it could be a sign of a company in deep trouble.

A company's P/E ratio is heavily influenced by its expected growth. A low P/E often implies low future growth. Investors are unwilling