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Money Minute
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Price To Earnings Ratios
Money Minute
Figuring out whether or not a stock is on sale can sometimes be tricky. One of the many tools investors use to identify stocks that may be undervalued are price to earnings ratios.
 

Whenever I go shopping, I love finding a great bargain. The same is true when it comes to the stock market, but figuring out whether or not something is on sale can sometimes be tricky.

One of the many tools investors use to identify stocks that may be undervalued are price to earnings ratios. The price to earnings ratio, or P/E ratio, is calculated by dividing the stock price of a company by its earnings per share. The concept behind P/E ratios is simple: a price to earnings ratio tells you how much you need to spend in order to acquire a dollar of a company’s earnings.

Typically, a stock with a lower P/E ratio is preferable to a stock with a higher P/E ratio. When comparing P/E ratios, it is important that the stocks you are looking at are in the same sector, since P/E ratios vary from sector to sector.

Price to earnings ratios are only one of the tools that should factor into your investment decision. Other factors you should consider include industry climate, competitive advantage, and a company’s management team—just to name a few.





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