P/E ratio

Definition

The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. For example, the P/E ratio of company A with a share price of $10 and earnings per share of $2 is 5. The higher the P/E ratio, the more the market is willing to pay for each dollar of annual earnings. Companies with high P/E ratios are more likely to be considered "risky" investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Comparing P/E ratios is most valuable for companies within the same industry. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. also called earnings multiple.

Also see: List of Important Financial Ratios for Stock Analysis at InvestorGuide.com.

Use P/E ratio in a sentence

You should try and break down your p/e ratio and see what you can learn from it that may help you.

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My brother insisted on buying many shares in his company after the price collapsed because the P/E ratio showed that the company was very cheap.

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They were trying to figure out what companies to invest in. They decided to limit their number to ten and then review the P/E ratio of each to try and find a underpriced stock.

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