Corporate Accounting

What is the Price Earnings Ratio?

Price Earnings Ratio

Price Earnings Ratio (P/E ratio) is one of the best known and widely used tools to measure the expected growth in a company’s stock price. This ratio is widely used in the market because it provides investors with good insights into how likely a company is to continue generating profits and hence, generating greater value for its shareholders. Therefore, it is a good gauge to predict the future profitability of a company.

The Price Earnings ratio tells us how much we would have to pay to own one share of the company’s stock as compared to the company’s earnings. In other words, the price-earnings ratio tells us how much we would have to pay for a single share of the company’s stock as compared to the company’s earnings per share. The higher the P/E ratio, the higher the price we pay for a share of the company’s stock, while the lower the P/E ratio, the lower the price per share we would buy.

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