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price-to-earnings (p/e) ratio

This is best conceptualized as the value of the company versus its annual profit (technically, it’s the value of the company’s stock vs its earnings). Companies that are “richly” valued are worth a lot relative to their profits – that’s usually because their profits are expected to increase quickly in the future and, therefore, investors are paying up for access to those future profits. Stocks with “cheap” valuations are usually mature or struggling companies, i.e. they are unlikely to exhibit much profit growth (although this doesn’t necessary mean they are bad investments).

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