P/E Ratio
The P/E ratio, or Price-to-Earnings ratio, compares a company’s share price to its earnings per share.
Quick reference:
Formula: Share price ÷ Earnings per Share (EPS). Purpose: Shows how much investors are paying for profits.
High P/E: Market expects higher growth. Low P/E: Lower growth prospects.
Expanded explanation:
The P/E ratio is one of the most common tools investors use to judge if a company looks expensive or cheap. A high P/E ratio means investors are willing to pay more for each dollar of profit, often because they expect strong growth. A low P/E means the market is paying less, which may signal value or risk if the company is struggling.
The ratio is best used by comparing a company’s P/E to others in the same industry, or its own historical average. Looking at the P/E in isolation can be misleading but as part of a broader toolkit it helps investors understand market expectations.
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