Jim Cramer’s guide to investing: What’s a price to earnings multiple?

CNBC’s Jim Cramer told investors it’s important to understand the basics of terminology used to describe a company’s value, including price-to-earnings multiples.

The price-to-earnings multiple, also referred to as a P/E multiple or just a multiple, is the ratio of a company's share price to its earnings per share. This multiple is used to determine how much investors are willing to pay for a company's stock in relation to its earnings. "Price-to-earnings multiples aren't static. In different markets, people will pay more or less for the same amount of earnings," he said. "When they pay more, we call that multiple expansion and when they pay less it's called multiple contraction—two more terms that sound much more complicated than they really are."

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