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Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.

The price-to-earnings ratio is a stock’s current price divided by its earnings per share. A stock trading at $40 with an EPS of $2 would have a P/E ratio of 20. So would a stock trading at $20 with an EPS of $1. With both, investors pay $20 for each dollar of earnings.

If a stock’s P/E is 40, investors pay $40 for each dollar of earnings. This seems like a bad deal, but that’s not always so.

A company with a P/E of 40 can grow revenue and earnings faster than a company with a P/E of 20, thus commanding a higher price for higher future earnings. The P/E 40 stock’s price might be based on reliable earnings estimates, while the other company’s future earnings are questionable.

P/E ratios vary among industries. Companies in stable, mature industries that have moderate growth potential usually have lower P/E ratios than companies in new, quick-growing industries with robust future potential. Investors should only compare the P/E ratios of companies from the same industry with similar characteristics.

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