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Figuring out a company’s intrinsic value with PE ratio
The price-earnings (P/E) multiple has been one of the most popular tool analysts use to value stocks. A company trading at 10x P/E implies that investors are willing to pay 10 times the net income that was generated. In other words for every $1 in net income generated, investors are willing to pay $10 or a 10% earnings yield. Despite its popularity, it remains one of the most misunderstood metric. A share valued at 30x P/E may not be expensive relative to another stock trading at 15x PE. Likewise, a share trading at lower P/E today, when compared to its 10-year median P/E, does not imply that it is a bargain.
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