Tuesday, January 4, 2011

PE Ratio

The PE ratio (Price to Earnings ratio) is the current stock price per share divided by the current, trailing, or forward earnings per share. The PE ratio is used as a valuation metric, with a high PE ratio indicating a relatively higher valued (or over-valued) stock, typically because the market perceives that the company has strong growth prospects; while a stock with a low PE ratio (sometimes referred to as a value stock) is valued relatively lower, perhaps because it has low growth prospects or has fallen out of favor with the market. A similar metric is the earnings yield, which divides the earnings per share by the stock price, giving an indicative yield - some investors will compare market-wide earnings yields to bond yields to gauge market sentiment and valuation trends.

Synonyms: PE, P/E ratio, Price to earnings ratio, PER

Comments?
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