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Finding a Stock's "True Value" Using The Price-Earnings Relative Screen

by Wayne A. Thorp, CFA

Finding A Stock's

Since the S&P 500 fell almost 40% in 2008, there are now bargains to be had in the stock market. That is not to say, however, that all stocks are priced attractively.

The price-earnings ratio (P/E)—or earnings multiple—is one of the most popular measures of company value. It is the current stock price divided by earnings per share for the most recent 12 months.

The popularity of the price-earnings ratio stems from how it relates the market’s expectation of future company performance—embedded in the stock price component of the equation—to a company’s actual recent earnings performance.

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Wayne A. Thorp, CFA is a vice president and senior financial analyst at AAII and editor of Computerized Investing. Follow him on Twitter at @AAII_CI.


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