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Definition: Price – Earning Relative
Generally the Price-Earning ratio stands for the Price of the company’s stock to the earning per share(EPS). This is the absolute P/E ratio. This indicates the price which the trader is willing to quote per dollar of earning in the company. However the relative P/E ratio signifies the measure of the current P/E ratio to the past P?E ratio or to some benchmarked P/E ratio such as 10 years period. This gives a good measure of high or how low to the historic benchmark the P/E ratio reaches.
For eg, the P/E ratio of a company A over the last 10 years has varied from 15 to 40. Currently let us assume that the P/E is 25, then the relative P/E ratio with respect to highest value is 0.625(25/40) and the relative P/E ratio with respect to lowest value is 1.67(25/15). Thus the figures lead the investors to the conclude that the P/E ratio is currently 62.5 % of 10 years high and 67% higher than 10 years low.
Increase in the relative P/E ratio signifies that there is a chance that the stock is overvalued. However changes in the organizational structure like merger and acquisition of a profitable entity can lead to increase in relative P/E ratio.
Relative P/E ratio when compared to the benchmark of market competitors, it shows how the company is performing in the market. A higher ratio can signify that the company is earning higher than the others thorough their operation. But a very large difference in the ratio with the needs more scrutiny.
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