Price to Earnings (P/E) is a financial metric which shows the ratio of a firm’s current share price to its earnings per share. This is an extremely common multiple used to evaluate whether a company is under or overpriced. Usually the higher the P/E ratio, the more overvalued the firm is.

The calculation of P/E is:

  • Market Value Per Share / Earnings Per Share

For example, if a share is currently trading at $50 and EPS are $2 per share, the P/E ratio is 25 ($50 / $2).

The P/E of different firms cannot really be compared unless they are in the same sector as the typically P/E values will vary between sectors. Technology firms for example usually have high P/E ratios.

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