P/E: My Personal Guide to Unraveling this Fundamental Indicator

Hello, market folks! Let's talk about an indicator that I use a lot in my analyses and that I consider essential for anyone who wants to invest without falling into traps: the famous Price/Earnings (P/E).

What is this P/E really?

In my view, the P/E ratio is basically how much money you are willing to pay for a company's earnings. Imagine you are buying a money-making machine - the P/E ratio shows in how many years this machine will pay for itself with current profits.

It seems simple in theory: we divide the stock price by the earnings per share. But in practice, things get much more complex, believe me!

Formula: P/E = Price per share ÷ Earnings per share

Types of P/L that I use in my analyses

• P/L trailing: based on the actual earnings of the last 12 months. I prefer this because it shows what really happened, not empty promises.

• P/L forward: based on future forecasts. I always distrust those projections, I've seen analysts get it very wrong!

• Relative P/E: compares with other companies in the sector. It's commonly used to avoid falling into the trap of thinking I am facing a bargain when in fact it is just a bad business.

How do I interpret P/E in practice

A high P/E ratio does not necessarily mean that the stock is expensive. It may indicate that the market expects explosive growth ( or that everyone has gone crazy and is paying too much ). On the other hand, a low P/E ratio can be an incredible opportunity... or a trap for unsuspecting investors.

Frankly, I have already lost money in both situations! Context matters more than the isolated number.

The failures of P/L that no one talks about

Market gurus love the P/E ratio, but rarely mention its limitations:

• It is useless for companies with losses! And how many promising startups do not fit into this case?

• Companies can manipulate profits with creative accounting. I have seen some doctored balance sheets that made me lose money...

• Does not consider debts. A company can have a low P/E ratio and be drowning in debt!

P/L in cryptocurrencies? Forget it!

I tried to apply the P/E ratio to my analyses of Bitcoin and other cryptocurrencies, but it is practically impossible. Cryptocurrencies do not generate profits like traditional companies.

Some DeFi platforms even generate revenue from fees, but comparing that to traditional P/E is like comparing oranges to bananas. Trading platforms try to create similar metrics, but they are still crawling in this regard.

In my opinion, the crypto market needs its own evaluation metrics - simply trying to apply traditional concepts does not work well.

The P/E ratio is a powerful tool, but use it as a compass, not as a GPS. Combine it with other indicators and, above all, with your common sense. I have seen many people get burned by blindly trusting a single number!

The market is not an exact science. Therefore, study, analysis, and a touch of intuition will always be necessary to navigate these turbulent waters.