IMPORTANCE OF THE PRICE/EARNINGS RATIO
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The price/earnings ratio is one of the easiest tools you can use
to measure the value of a stock. You can use it to measure whether a stock is
undervalued or overvalued, which will help you decide whether to buy or sell it.
P/E ratios can help you sort the "winners" from the "losers," and are so
important that you can find them in the business section of your local
P/E ratios are useful when comparing companies in the same
industry. The company with the lower P/E ratio may be undervalued and a better
stock pick. A company's P/E ratio compared to an industry average may be useful
to deciding whether to buy or sell a stock.
Although P/E ratios are quoted in financial publications, most
analysts adjust them to account for factors that can distort their meaning. To
help you fine-tune the P/E ratios, we will discuss what some of these factors
Let's start by looking at the external factors that can
influence the P/E ratio.