A ratio that establishes a comparison between the price of a stock and its net earnings, i.e., the number of times a company’s after-tax earnings are 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 earnings. The P/E ratio of a stock is calculated by dividing the stock’s price by the net earnings per share, discounted for taxes. It is one of the most widely used multiples to estimate whether a company’s stocks are expensive or cheap and to compare between similar companies in the same sector. The higher the P/E ratio, the lower the net earnings relative to its current market price. Multiplying the P/E ratio by the net earnings of the company facilitates the obtaining of an indicative value of a company.
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