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P/E ratio definition
P/E ratio (price-to-earnings ratio) is a stock valuation metric that compares a company's share price with its earnings per share. It shows how much investors pay for each unit of a company's earnings.
A higher P/E ratio can signal stronger growth expectations or an expensive valuation. A lower P/E ratio can signal a cheaper valuation or weaker business expectations. The metric is most useful for comparing companies in the same industry.
Trailing P/E uses earnings from the past 12 months, and forward P/E uses expected future earnings. The ratio breaks down for companies with negative earnings, where it returns no meaningful figure.
P/E ratio Example
A company's stock trades at USD 60 per share and reports earnings per share of USD 4. You work out the P/E ratio:
P/E ratio = share price √∑ earnings per share
USD 60 √∑ USD 4 = 15
The stock trades on a P/E of 15, so investors are paying USD 15 for every USD 1 of company earnings.
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