New York - A price earnings ratio (PE) is calculated by dividing the market price per share of an individual stock by the current or a projected annual earnings per share. It reflects the market's expectations regarding earnings growth potential and risk.
An individual PE of a stock, in our opinion, is not really meaningful.
You need to evaluate the PE of any given stock with the PE of comparable companies (usually competitors) within a particular industry. Stocks with high PE ratio, when compared against competitors within a particular industry, generally indicate that it is being valued by the market on the basis of high-expected growth potential relative to other companies.
For instance, if your stock has a PE ratio of 50 as compared to an average of 20 for competitors, it likely indicates that the market expects earnings growth of 50% compared to competitors that are expected to grow at 20%. This means your stock is more vulnerable to a sudden downturn if anticipated prospects change. Hence, if you do not believe the company's earnings growth will be 50% you should consider selling your stock.
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