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Price Earnings Ratio
June 07 , 2012

The Price Earnings Ratio (PE Ratio) is a very important ratio used in stock analysis. It is the ratio of the value of a share of the company, to the net profit each share has made.

PE Ratio =  Value of Share / Net Profit of each Share

in other words,

PE Ratio =  Market Price Per Share ( MPS) / Earnings Per Share ( EPS)

It is easy to get this information from research reports or annual reports. Do note, however, that annual reports often give trailing PE ratios, wherein the earnings of the previous year are considered. Analyst reports, since they are forward looking, give leading PE ratios, where earnings projections for the coming year are considered. Thus, trailing PE is a known number, while leading PE is only an estimate.

Generally, PE ratios for stocks in a particular sector tend to lie within a range. Whether they are high (above 20) or low (below 10), depends on the growth perception of that sector. Generally, high-growth and less risky sectors tend to have higher PE ratios. Within a sector, a company that is expected to do well will have a higher PE ratio than the other.

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