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What is Price-to-earnings ratio (P/E ratio)

Updated: Apr 9, 2023

Price-to-earnings ratio (P/E ratio) is a valuation metric used in stock analysis to evaluate a company's current stock price relative to its earnings per share (EPS). It is calculated by dividing the current market price of a company's stock by its earnings per share (EPS) over the past 12 months.

The P/E ratio is an important tool for investors and analysts to determine whether a stock is overvalued or undervalued. It helps investors understand how much they are paying for each dollar of earnings generated by the company.

A high P/E ratio may indicate that the market expects the company to grow significantly in the future or that the company is currently overvalued. Conversely, a low P/E ratio may suggest that the market is undervaluing the company or that the company is experiencing a slowdown in growth.

The P/E ratio is also useful for comparing companies within the same industry or sector. Generally, companies with higher growth rates or stronger earnings potential may have higher P/E ratios than those with lower growth rates or weaker earnings potential.

However, it's important to use the P/E ratio in conjunction with other metrics and analysis methods to make informed investment decisions, as the P/E ratio alone does not provide a complete picture of a company's financial health or future prospects.

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