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PE Ratio Formula:
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The PE (Price-to-Earnings) ratio is a financial metric used to evaluate a company's current share price relative to its per-share earnings. It helps investors determine if a stock is overvalued or undervalued compared to its earnings potential.
The calculator uses the PE Ratio formula:
Where:
Explanation: The PE ratio indicates how much investors are willing to pay per dollar of earnings. A higher PE suggests investors expect higher earnings growth in the future.
Details: The PE ratio is one of the most widely used valuation metrics in stock analysis. It helps compare companies within the same industry and assess market expectations about a company's future growth prospects.
Tips: Enter the current stock price and earnings per share in dollars. Both values must be positive numbers greater than zero for accurate calculation.
Q1: What is considered a good PE ratio?
A: There's no universal "good" PE ratio as it varies by industry. Generally, a PE ratio between 15-25 is considered reasonable for most established companies.
Q2: What does a high PE ratio indicate?
A: A high PE ratio typically indicates that investors expect higher earnings growth in the future. However, it could also mean the stock is overvalued.
Q3: What does a low PE ratio indicate?
A: A low PE ratio may suggest that a stock is undervalued or that the company is experiencing problems that affect its earnings potential.
Q4: Are there limitations to using PE ratio?
A: Yes, PE ratios can be misleading for companies with negative earnings, and they don't account for company debt levels or growth rates.
Q5: Should PE ratio be used alone for investment decisions?
A: No, PE ratio should be used in conjunction with other financial metrics and qualitative factors to make informed investment decisions.