Price to earnings ratio (P/E)

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    The price to earnings ratio (P/E) gives the relation between the stock price and the company’s earnings. It is calculated as follows:

    P/E = stock price / earnings per share

    For example, if a company’s share has a current value of $40 and the earnings of one share over the past 12 months was $2, your P/E ratio would be 20.

    P/E = 40 / 2 = 20

    This shows that an investor is willing to pay $20 in order to make $1 of current earnings.

    It is important for stock traders because normally a high P/E indicates that investors are expecting growth in the company’s earnings. As the price to earnings ratio does not say much on its own, it is usually compared to P/Es within the same industry, to the market itself or against the company’s historical data.

    Note that a minority of financial institutions use the abbreviation PER instead of P/E.