Definition
A metric that compares a company’s share price to its earnings per share, helping investors gauge if a stock is over- or under-valued.
What to consider
- Use it to compare the valuation of similar companies.
- Consider it alongside other metrics for a complete picture.
- Remember that a high P/E might indicate growth potential but also risk.
Real world scenarios
- Investigating a stock’s P/E ratio, Rhett sees it’s significantly higher than industry norms, signaling potential overvaluation.
- Mina notices a low P/E for a steady-growth company, viewing it as an undervalued buying opportunity if fundamentals remain solid.
- Comparing P/E ratios among similar businesses guides Yusuf in choosing which stock aligns with his risk tolerance and valuation preference.
Related terms
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