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What is a “PE ratio”?


A price-earnings ratio is the most basic measure of a company’s value. Divide the company’s stock price by its earnings per share, and that’s the PE. Take Apple: Divide its recent price of $397.41 by the $27.68 of earnings reported for the latest four quarters and you get a PE of 14.36. That makes it a bit more expensive than the broad stock market, which has a PE of about 13. But when you consider that Apple’s earnings are expected to grow much faster than those of the average American company, Apple starts looking less pricy. A PE ratio should never be looked at in a vacuum but in the context of a company’s growth prospects, the PEs of other companies in the same industry and the PE of the market as a whole. The general economic backdrop is important too. Any particular PE ratio looks a lot better when activity is picking up and not so hot when a slowdown is setting in.

-Conrad de Aenlle