Equities
Price-to-Earnings Ratio
The P/E ratio is the most widely used valuation yardstick in equities. A P/E of 20 means investors are paying $20 for every $1 of annual earnings, which can be compared across companies and against a firm's own history.
A high P/E can signal that investors expect strong future growth, or simply that a stock is expensive. A low P/E may indicate a bargain or a company facing real trouble, so context matters.
P/E ratios also respond to interest rates. When yields rise, investors tend to pay less for future earnings, which compresses valuations across the market.
Example
If a stock trades at $100 and earns $5 per share, its P/E ratio is 20.
Price-to-Earnings Ratio — FAQ
What is Price-to-Earnings Ratio?
The price-to-earnings (P/E) ratio compares a company's share price to its earnings per share, showing how much investors are paying for each dollar of profit.
Can you give an example of Price-to-Earnings Ratio?
If a stock trades at $100 and earns $5 per share, its P/E ratio is 20.
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