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Price/Earnings (P/E Ratio)

The Price/Earnings (P/E) ratio is a commonly used valuation metric that compares a company's stock price to its earnings per share (EPS).It is calculated by dividing the stock's current price by its EPS. The P/E ratio helps investors determine how much they are paying for each dollar of earnings, providing insight into a stock's valuation. A high P/E ratio may indicate that a stock is overvalued or that investors expect high future growth, while a low P/E ratio may suggest undervaluation or lower growth expectations.

Example

A company with a stock price of $100 and an EPS of $5 has a P/E ratio of 20, meaning investors pay $20 for every dollar of earnings.

Key points

• Compares a company’s stock price to its earnings per share.

• Indicates how much investors are willing to pay for each dollar of earnings.

• A high P/E suggests growth expectations; a low P/E may indicate undervaluation.

Quick Answers to Curious Questions

It helps investors assess whether a stock is overvalued or undervalued relative to its earnings potential.

It often suggests that investors expect significant future growth from the company.

A low P/E ratio can signal that a stock is undervalued, offering potential for price appreciation as the market recognizes its true value.

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