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investing: p/e ratio basic question
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while on the surface it might not make sense to pay more than one dollar to get just one dollar back, the key thing is that a good company's earnings are recurring each year. so, you wouldn't just be paying for the $1 dollar of earnings per share this year, but for the entire future stream of earnings per share, every year, in perpetuity -- and the earnings may grow over time too (if it remains a good company.) your stock is a claim on a portion of the company's future. the brighter and/or more certain that future, the more investors are willing to pay for each recurring dollar of earnings. and the p/e ratio tells you, in effect, how many years it might take for your investment to earn back what you paid – assuming earnings remain the same. but you would hope the earnings would grow, too. when a company's earnings are widely expected to grow, the p/e for the stock is often higher than average. bear in mind you don't actually receive the company's earnings, since management often decides to reinvest all or a portion of it to grow the company. yet, many companies do pay a portion of earnings out as dividends. dividends are money in your pocket each year.
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