P/E RATIO

Price to earnings ratios are a common way to assess whether a share is cheap or expensive.

The ratio compares the current share price to one year’s earnings, typically either the last year or a forecast for the next year. The higher the current share price in relation to one year’s earnings per share the more expensive the firm as this suggests investors could be waiting quite some time to recoup their investment in earnings terms. Equally a low ratio of share price to earnings per share can suggest the share is cheap although be warned – it may also indicate that investors see little prospect of future earnings growth.

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