A valuation ratio calculated by dividing a stock's current price by its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings and helps assess whether a stock is overvalued or undervalued.
Combination of 'price' (from Latin 'pretium' meaning value) and 'earnings' (Old English 'earnian'). The P/E ratio became a cornerstone of stock analysis in the 1930s as investors sought standardized ways to compare company valuations across different industries and market conditions.
The P/E ratio is like asking 'how many years would it take to earn back my investment?' - a P/E of 20 means 20 years at current earnings! But here's the twist: growth companies often trade at high P/E ratios because investors expect earnings to grow rapidly, making today's high ratio tomorrow's bargain.
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