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What is P/E Ratio?

Definition of P/E Ratio

The 'Price to Earnings' (P/E) ratio is simply the stock price of a company divided by the after-tax earnings of the company per share. It is a key metric used by stock investors in determining how fairly valued a stock may be. If the P/E ratio is just 1 then the company is seen as just able to cover its costs with no further assets - tangible or intangible - available to be factored into the price. The higher the P/E ratio, the greater are the market expectations that the company will improve its earnings over time. Companies, though, with very high P/E ratios in comparison to its peers in the same stock index, can either be seen as full of extraordinary potential or as a stock that has been over-hyped into a 'bubble' that may burst (as happened notably in the Dot-com bubble in 1990s).
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