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Why Is the Price/earnings Ratio a Common and Popular Technique

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Essay

Why is the price/earnings ratio a common and popular technique for evaluating stocks? Why do fast growing firms have higher P/E ratios? What is a long-run average P/E ratio for larger publicly traded firms in the United States? What are some limitations to using this technique to evaluate stock prices?


Definitions:

Installment Method

A tax method that allows income from sales to be reported for tax purposes when the payment is received, rather than at the point of sale.

Established Securities Market

A recognized exchange or market where securities, stocks, bonds, and other financial instruments are traded among investors.

Related Parties

Individuals or entities that have relationships with each other, affecting financial or operational decisions due to existing connections.

Lineal Descendants

Direct offspring of an individual, such as children, grandchildren, and great-grandchildren.

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