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What does a stock's P/E ratio indicate?
The P/E ratio, also known as the price-to-earnings multiple, gives investors an idea of how much they are paying for a company's earning power. The higher the P/E, the more investors are paying for a stock relative to its net earnings, and so the more future earnings growth they are anticipating.
Stocks with P/Es over 20 generally are young, fast-growing companies. They tend to be more risky to purchase than low P/E stocks, because it is easier for a company to fail to achieve high-growth expectations than low-growth predictions. Low P/E stocks usually are found in low-growth or mature industries, in stock groups that have fallen out of favor or in old, established blue-chip companies with long records of earnings stability and regular dividends.Return to Questions
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