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What is P/E Ratio?

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Price to earnings ratio, or P/E, is a way to value a company by comparing the price of a stock to its earnings. The P/E equals the price of a share of stock, divided by the company’s earnings-per-share. It tells you how much you are paying for each dollar of earnings.

Low or high P/E ratios aren’t inherently good or bad.

When a P/E ratio is low, it could mean that investors are losing confidence, selling shares and driving the price down—while earnings hold steady. The P/E could also be low if the company’s earnings grow quickly—before investors notice and start buying shares—driving the price up.

Similarly, a high P/E could result if investor excitement drives the share price up while earnings remain low. OR—that high P/E may be justified, if the company is poised for growth.

Make sure you research companies carefully. Compare the company’s P/E to others in its industry, and analyze any inconsistencies.

P/E is a complementary tool. Use it with other factors and information when evaluating a company’s stock price.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Investing involves risk including loss of principal.

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