price/earnings ratio


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

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The price/earnings ratio was useful in the presentation the financial analyst made to the board of directors because the metric had changed recently.

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When Samuel looked at the price/earnings ratio of the stock that he was considering for purchase, he knew that it would be a very solid investment for him to make.

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The key measure my hedge fund manager says he always looks at when making an investment decision is the price/earnings ratio, which he says gives him a clear picture of how the company's earnings compare to its share price.

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