Personal finance: Ask the fool

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Q: What's a P/E ratio? - DR, Glasgow

It stands for price to earnings ratio, and is a share price divided by its earnings per share. So, if Dodgy Bros is trading at 100p per share and has earnings per share of 5p, its P/E ratio is 20.

That's the easy part. The difficult part is interpreting it. We're sorry to say that on its own, it doesn't really tell you much. Some people say that a company is fairly valued if P/E equals future growth rate. So, if Dodgy Bros was expected to grow at 20 per cent next year, you may say it is fairly valued.

This is just a rule of thumb. There are many other ways to assess the value and future prospects of a company.

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