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# P/E Ratio

## What is P/E Ratio?

The P/E ratio (price-to-earnings ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.

High ratio indicates the share is overvalued and low ratio shows that share is undervalued.

## How to Calculate P/E Ratio?

It is computed by the following formula: For example, if the company’s share price is Rs. 40 and the earning per share is Rs. 10 then price earning ratio is 4 (i.e., 40/10). It means that the market value of every rupee of earning is four times.

It is very important ratio in order to know whether the shares of the company are undervalued or in predicting the future market price. If one stock has a P/E twice that of another stock, all things being equal (especially the earnings growth rate), it is a less attractive investment. Companies are rarely equal, however, and comparisons between industries, companies, and time periods may be misleading.

P/E ratio in general is useful for comparing valuation of peer companies in similar sector or group.

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