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Finance Dictionary and Glossary of Investment Terms
Current stock price divided by trailing annual earnings per share or expected annual earnings per share. Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25.50 = 10 times $2.55. XYZ stock sells for ten times earnings.
Also known as the P/E multiple, this is the latest closing price divided by the latest 12 months'' earnings per share. P/E is perhaps the single most widely used factor in assessing whether a stock is pricey or cheap. A company''s P/E should be looked at against those of similar companies, and against that of the stock market as a whole, since different industries and even different companies are characterized by markedly different P/Es. In general, fast-growing technology companies have high P/Es, since the stock price is taking account of anticipated growth as well as current earnings. High-tech companies often trade at P/Es above 40, or about double the overall market P/E. Banks, on the other hand, typically have below-market P/E ratios.A high P/E is often a reflection of lofty expectations for a stock, since no one would invest knowing it would take 40 years just to make one''s money back. The idea is that earnings will grow. A high P/E can also reflect poor recent earnings. A low P/E can imply low investor expectations, an undervalued stock, or both. Some investors like to compare P/E to the growth of earnings per share. The resulting PEG ratio (P/E divided by growth rate) gives some idea of whether investor expectations are reasonable given past performance. Value investors sometimes say that a PEG ratio of less than one means a stock is cheap.
See price/earnings ratio