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Price to Earnings Ratio

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updated 20 Feb 2023

Price to Earnings Ratio, often referred to as P/E is a ratio that is calculated by taking a companies Price Per Share / Earnings Per Share .

Why does it matter?

Often times, new investors mistake share prices that are low for a company being cheap. But the number of shares a company has can greatly manipulate share price. The price to earnings ratio takes the number of shares out of the discussion by using the earnings per share. Price to Earnings Ratio will tell you how much you are paying for $1 of earnings, rather than how much you are paying for a share. So if a company has P/E of 15, you are paying $15 for $1 of earnings. Low P/E ratios can be an indicator of an undervalued or cheap company. A company with a lower P/E ratio relative to competitors in a similar industry can be considered "cheap"

Who uses it

P/E Ratio is considered one of the most important metrics in evaluating a company according Benjamin Graham and Warren Buffett. And with Buffets success it has gone on to influence many Value Investors use P/E ratio to evaluate a company.

Other Resources

P/E Ratio Basics