Three investing pitfalls to avoid

Ratios can offer investors a clear view of whether a share is a buy or a sell. But it can be dangerous to rely too heavily on them. Here are three traps to watch out for.

We like price/earnings (p/e) ratios. They can give a clear, simple view of whether a share is a bargain buy, or an overpriced sell. However, it's sometimes dangerous to take ratios at face value. Here are three traps to watch out for.

Data quality or lack of it can be a problem. The p/e is the current share price divided by annual earnings. If you use last year's profit figure on the basis that it is known, the ratio is out of date. Yet use a more relevant estimate of future earnings and you are relying on your ability to predict the future. And even if you could get it spot on, is one year's earnings a true reflection of a firm's underlying profitability?

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