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Price/earnings ratio explained.

A comparison between a share price and a specified earnings-per-share figure. Clarify whether the earnings are historical, adjusted, or estimated and whether the comparison is meaningful.

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Price/earnings ratio

A comparison between a share price and a specified earnings-per-share figure. Clarify whether the earnings are historical, adjusted, or estimated and whether the comparison is meaningful.

Example: A fictional $40 price divided by $2 of annual earnings per share is 20.

Watch for: Treating a low ratio as proof that an investment is undervalued.

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