Originally posted by: amdskip
P/E is shorthand for the ratio of a company's share price to its per-share earnings. For example, a P/E ratio of 10 means that the company has $1 of annual, per-share earnings for every $10 in share price. Earnings by definition are after all taxes etc.
A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings. A company's per-share earnings are simply the company's after-tax profit divided by number of outstanding shares. For example, a company that earned $5M last year, with a million shares outstanding, had earnings per share of $5. If that company's stock currently sells for $50/share, it has a P/E of 10. Stated differently, at this price, investors are willing to pay $10 for every $1 of last year's earnings.
Relative P/E Ratio is the ratio of a stock's P/E to its historical high and low P/E. The historical high and low P/E's can be "all-time" values, or may be determined over the last three or five years.
If the majority have dashes or "NMF" under the price-to-earnings column, then the fund?s P/E carries a poor correlation with the true underlying risk.
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