Price-To-Earnings Definition Thursday, June 20, 11:11 AM ET
The price-to-earnings -- or "P/E" -- ratio, is a useful valuation metric that expresses how cheap or expensive a share of stock is, relative to the underlying earnings per share (or "EPS"). It is often used when comparing two different companies that are similar. For example, if two very similar companies both are expected to earn one dollar per share, but one stock trades at 10 versus the other at 5, the one at 10 is twice as expensive on a P/E basis.
The P/E ratio of a broad index such as the S&P 500 can be a useful metric in judging whether the overall market is overvalued, or undervalued relative to earnings. Historically, both the average and median price to earnings ratio of the S&P 500 has been around the 15 mark.
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