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P/E Ratio

P/E Ratio

The price-to-earnings ratio or P/E ratio is the ratio of a company's stock price to the earnings per share.

The P/E ratio of a company is a useful, but not perfect, metric to evaluate share price. A P/E ratio of 20 means that, for every 20 USD you spend on stock, the company earns 1 USD annually. In other words, the company earns 5% of your investment annually. The long-term average P/E ratio for the S&P 500 is about 15. A high P/E ratio may indicate a stock is expensive relative to the company's earnings, often because analysts expect a significant increase in future earnings. Analogously, a low P/E ratio indicates a low stock price relative to earnings, and often indicates that analysts expect the earning to be stagnate or decrease.

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Investopedia's article on P/E ratios