The price-earnings ratio is one of the most commonly used measures in fundamental stock analysis because it is simple to calculate and it provides a great deal of insight. The price-earnings ratio is calculated by dividing the stock price by earnings per share. It relates the market’s expectation of future company performance, embedded in the price component of the equation, to the company’s earnings performance. However, it can be tricky to determine whether a price-earnings ratio represents a buying opportunity. Price-earnings (P/E) relative compares a company’s price-earnings ratio to that of the market or industry. The P/E relative can be used in a number of interesting ways to help guide your investment analysis.
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