What is PE ratio?
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The Price-to-Earnings (P/E) ratio is a financial metric used to evaluate the valuation of a company’s stock. It’s calculated by dividing the current market price per share of the company’s stock by its earnings per share (EPS).In simple terms, it shows how much investors are willing to pay for each dollar of earnings generated by the company. A high P/E ratio suggests that investors are expecting higher earnings growth in the future, while a low P/E ratio may indicate that the stock is undervalued or that investors have lower growth expectations.
For example,Imagine you’re buying a pizza place. The P/E ratio is like asking, “How many dollars do I have to pay for each dollar the pizza place makes?”If the P/E ratio is high, it’s like paying a lot for each dollar the pizza place earns. It might mean people expect the pizza place to make more money in the future.If the P/E ratio is low, it’s like getting a good deal—you’re paying less for each dollar the pizza place earns. It might mean people don’t expect the pizza place to grow much.So, the P/E ratio helps you figure out if a company’s stock is a good deal or if it’s too expensive, based on how much money the company makes.