1. A valuation ratio of a company’s current share price compared to its per-share earnings. For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

Demystified: How to use PE ratio to value a stock During bear markets, stocks generally trade at lower PE multiples and during bull markets at higher levels in relation to historical values.

The PE ratio is probably the most common measure to help investors compare how cheap or expensive a firm’s shares are, as stock prices, for lack of a better term, are arbitrary. The trailing PE is just the price per share of the stock divided by the annual net diluted earnings per share the firm generated in its last fiscal year. The forward PE is the price per share of the stock divided by next fiscal year’s annual net diluted earnings per share of the firm. It’s only when investors compare a firm’s share price to its annual net diluted earnings per share that they can get a sense for whether a company’s shares are expensive (overvalued, overpriced) or cheap (undervalued, underpriced). The higher the PE, the more expensive the company.

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