Accounting Dictionary

Price Earnings Ratio

The market price of a share of a company’s stock divided by the company’s earnings per share is a measure of how cheap or how expensive that company is.

If a company cost $ 75 per share to buy and it earned $5 per share, the price earnings ratio would be $75/$5 or 15. In general a price earnings ratio of 15 indicates that the stock is selling for a fair price, although growth stocks often have higher ratios.

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