Course 303:
Price/Earnings Ratio
In this course
1 Introduction
2 How to Use P/E
3 P/E's Flip Side, Earnings Yield

Probably the most popular valuation measure used by investors is the price/earnings ratio, or P/E. Numerically, a P/E is the price of a stock divided by its earnings per share (EPS) during the past four quarters. For example, a $20 stock that has earned $1 per share during the past year has a P/E of 20. You can find a stock's P/E ratio on the Morningstar Stock Report. A P/E measures a stock's valuation--its popularity, if you will--by showing what multiple of earnings investors think a stock is worth. The faster investors think a company will grow, the more they like its stock, and the more they are willing to pay for each dollar of its earnings. America Online AOL boasted a P/E of more than 600 at the end of 1999 because investors expected supercharged growth. Airline stock UAL UAL languished at a P/E of about 12 because of its cloudy prospects. So what's the best way to use P/E in valuing stocks?

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