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|What is a PE ratio & is my stock's PE too high?
By The-Adviser.com -
|New York - A price earnings ratio (PE) is calculated by dividing the market price per
share by the current or a projected annual earnings per share. It measures the market's
expectations regarding earnings growth potential and risk.
You need to evaluate your stock with competitors within a particular industry. Stocks with high PE ratio, when compared against competitors within a particular industry, generally indicate that it is being valued by the market on the basis of high-expected growth potential relative to other companies.
For instance, if your stock has a PE ratio of 50 as compared to an average of 20 for competitors, it would indicate that the market expects earnings growth of 50% compared to competitors that are expected to grow at 20%. This means your stock is more vulnerable to a sudden downturn if anticipated prospects change. Hence, if you do not believe the company's earnings growth will be 50% you should consider selling your stock.
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PE ratios should be viewed on a relative and on a historical basis.
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