Understanding Equities - Question 77

What does P/E mean? I see it in the paper when I look up my stocks.

PE stands for the price-earnings ratio. To calculate the P/E for a particular company, divide the market price of one share of stock by the annual earnings of one share of stock. For example, if the market price of a specific stock is $30 and the earnings per share are $3, then the P/E = 10.

Investors use the PE ratio as a yardstick in evaluating a company's comparative worth. Some analysts recommend buying stocks with low P/E ratios (under 10) because it may be undervalued. It's a good idea to understand what PE is and realize it is one of many measures to use when deciding whether to invest in a particular company.