The Use of the P/E Ratio to Stock Valuation

Several methods have been created to value stocks. The method using the P/E ratio is described and applied in the paper. This ratio is used in the framework of the profit model of the fundamental analysis. At the first, various methods to estimate the intrinsic value of a stock are presented in the paper. Then, the P/E ratio is detailly analyzed, including describing of options of its use. The aim of the paper is to show by means of the application of described method to stock valuation, the specific way, which could be used by many investors within their investment decision. In that the contribution of the paper resides. Within the realization of the empirical analysis, selected tests and determination index are used to statistical assessment of the relation between the P/E ratio and stock price. Author also presents other options how to use the P/E ratio in the practice. For example, creating their investment policy, investors could verify the validity of the low P/E effect.