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Matt's Market Insights

 

The Curious Nature of P/E Ratios

 

As one of the most commonly touted valuation metrics, people often quote P/E ratios without a second thought as to how they behave. The general perception is that high P/E ratios indicate an overvalued company or market, and low P/E ratios indicate an undervalued or perhaps "better" valued company or market. For some investors, adherence to this metric can be a major driver of investment decisions. P/E ratios are sometimes referred to as "earnings multiples," conveying the notion of how much investors are willing to pay for a given stream of earnings.

 

When stock prices move higher, it is typically the result of one of two factors, or both working in concert: either company earnings are increasing, which allows the share price to increase while maintaining the same P/E ratio, or investors decide they are willing to pay more for a given stream of earnings, causing the ... Log in or subscribe to continue reading.


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