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- Companies that reinvest earnings, building new factories and otherwise expanding their operations, sometimes have relatively high P/E ratios. This occurs because many investors are willing to buy the stock at higher and higher share prices in expectation of a future payoff from the company's investment. Likewise, investing in future growth does not always immediately translate into higher current earnings.
- Paying dividends can cause a company's P/E ratio to rise. Paying dividends does not increase earnings, yet many investors are willing to pay higher prices to receive regular dividend payments. According to Seeking Alpha, reinvested dividends accounted for 87 percent of the total S&P 500 return between 2000 and 2010. Thus, it makes sense that investors would be willing to pay higher share prices to earn cash dividends.
- Stock prices are not always determined as a result of rational investor behavior. Stock prices also rise and fall in response to fear and greed. When stock prices are steadily rising, investors can become greedy, buying shares at higher prices in expectation of even higher prices. When stocks are falling, investors can panic and sell their shares out of fear they will fall even further. Fear and greed do not have the same impact on earnings, so P/E ratios will rise and fall with rising and falling stock prices.
- When a company increases its debt, it can cause the P/E ratio for its stock to fall. Many investors concerned that the costs of higher debt will negatively impact the company's future earnings sell their shares in response, causing share prices to decline. Thus, a lower P/E ratio does not always indicate higher stock value. Sometimes P/E ratios fall in response to increased risk.
Company Growth
Dividends
Fear and Greed
Company Debt
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