Asked by Tonya Sims on September 08, 2021
Categories: Personal finance Options
Rating: 4.7/5 (34 votes)
Value compression, or_multiple compression, is simply when a stock's valuation multiple, typically the price/earnings multiple, gets smaller. Value compression, sometimes called “multiple compression,” is simply when a stock's valuation multiple, usually the price/earnings ratio, gets smaller.
What is PE expansion? During bull markets, the earnings may grow, but the increase in price is usually due to the increasing PE. This is known asPE expansion. During PE expansion, investors are willing to may more for the same unit earning.
How do you know if a stock is undervalued? Look for the book value per share on the company's balance sheet or on a stock website. Ratios under 1 are undervalued. To get the P/B ratio, take the current price of the share and divide by the book value per share. For example, if a share currently costs $60 and the book value per share is $10, theP/B ratio is 6.
What is a low PE ratio? In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative toearnings.
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