A ratio that establishes a comparison between the stock price and its net earnings, that is, the number of times that a company’s after-tax profit is contained in the price of one of its shares. It is an indicator of what the market would pay for each monetary unit of its profit. The P/E of a stock is calculated by dividing the share price by the net earnings per share, net of taxes. It is one of the most commonly used multiples to estimate whether a company’s shares are expensive or cheap and to compare between similar companies in the same sector. The higher the P/E, the lower the net earnings compared to its current price. The P/E, multiplied by the entity’s net earnings, facilitates the obtaining of an indicative value of a company.
« Back to Glossary IndexP/E (Price-to-Earnings Ratio)
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