The P/E ratio is perhaps the most widely used valuation metric in investing. It tells you how much investors are willing to pay for each dollar of a company's earnings. A P/E of 20 means investors pay $20 for every $1 of annual earnings.
Trailing P/E uses the past 12 months of actual earnings, while forward P/E uses analyst estimates for the next 12 months. The forward P/E gives a sense of expected future performance, but relies on estimates that may prove inaccurate.
A high P/E can indicate that investors expect strong future growth, or it could mean the stock is overvalued. A low P/E might signal undervaluation, or it could reflect declining business prospects. The P/E ratio is most useful when compared to peers in the same industry.
Different sectors typically trade at different P/E ranges. Technology companies often have higher P/E ratios because of expected growth, while utilities tend to have lower P/E ratios because of stable but slow growth.
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