Printing money

QWhen the government prints money, where does it go?

— A.M., Bend, Oregon

AThe Bureau of Printing and Engraving, part of the U.S. Department of the Treasury, prints billions of dollars’ worth of U.S. paper currency each year. It’s distributed through Federal Reserve Banks. Some of the cash replaces existing bills that are too worn, and some enters circulation when the Federal Reserve buys U.S. Treasury bonds on the open market.

Q

What does a low P/E ratio mean?

— P.B., Columbus, Indiana

AThe price-to-earnings ratio is a rough measure of a stock’s earning efficiency. To calculate it, divide a stock’s current price by a year’s worth of its earnings per share (EPS). If Dodgeball Supply Co. (ticker: WHAPP) is trading for $100 per share and has trailing EPS of $4, its P/E ratio is 100 divided by 4, or 25.

The P/E is often referred to as a “multiple” because it shows how much you would be paying for a stock per dollar of earnings. So a stock with a P/E of 20 would be priced at 20 times its EPS.

In general, a low P/E suggests that a stock is attractively priced — though struggling companies can often have low P/Es, too. A steep P/E may reflect an overvalued stock that’s more likely to stall or decline than to keep rising.

There’s no single standard that defines a low or high P/E ratio. P/E ratios vary by industry, with capital-intensive businesses (such as automakers) tending to have lower ones than those in lighter industries (such as software companies). Compare a company’s P/E both to its own average P/E, and to those of its peers. And never rely only on a P/E ratio when making decisions. Always examine a variety of metrics.