The definition of Price earnings ratio
The price of a stock divided by its latest annual earnings per share. This is known as trailing p/e, because it uses past earnings. Forward p/e uses the same calculation, but substitutes anticipated earnings. For example, a stock selling for $40 a share that reported earnings of $2.50 a share in the past year would have a trailing p/e of 16. If the same stock has projected earnings of $3 a share in the coming year, its forward p/e would be 13. If this earnings scenario is fulfilled, an investor who had to spend $16 to get one dollar of earnings will only have to spend $13 to get one dollar. That's why stocks with high p/e's are called expensive, while those with low p/e's are called cheap.
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