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The PE measures the value placed on a share by the market–this value is sometimes referred to as a share’s rating.

It has two main applications as a measure of relative value to see whether a share is cheap or expensive:

1 For individual stocks. It can be used to compare the relative value of the current price of one share against another share, or against an index or sector.

2 For overall market levels. It can be used as a means to evaluate how cheap or expensive a whole market, or a sector, is compared to their long-term average or to other markets or sectors.