2nd Dec 2009 by JonB
The PE ration refers to the Price to Earnings ratio or multiple and which a stock is trading at. Since the actual price of a stock is dependent on how many shares a company has, the PE multiple is a way comparing shares to each other in an apples-to-apples kind of way. Think of it like this: If company XYZ is earning $10 per share this year, how much would you be willing to pay for it? You may say $10, but if you plan to hold that stock for 20 years and you think they are going to continue earning $10 a year, it may be worth much more than $10 to you. You may be wiling to pay $20 or $30 or more. That's where the multiple comes in. Usually stocks trade for many times what they make in a year. If you were willing to pay $20 for a stock that earns $10, thats a multiple of 2. Price divided by earnings = the ratio or multiple.
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