P/E Ratio (Price-to-Earnings Ratio)

P/E Ratio (Price-to-Earnings Ratio)

What It Is

The Price-to-Earnings ratio (P/E ratio) is one of the most widely used valuation metrics in stock analysis. It compares a company's current stock price to its earnings per share (EPS).

Formula

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P/E Ratio = Stock Price / Earnings Per Share (EPS)

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What It Tells You

• High P/E: Stock may be overvalued OR investors expect high growth
• Low P/E: Stock may be undervalued OR company facing challenges
• Industry Average: Compare to sector peers for context

Example

If a stock trades at $100 and has EPS of $5:

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P/E Ratio = $100 / $5 = 20

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This means investors pay $20 for every $1 of earnings.

When to Use

• Comparing companies in the same industry
• Assessing if a stock is expensive relative to its earnings
• Identifying growth vs value stocks

Limitations

• Not useful for companies with negative earnings
• Can be misleading during economic cycles
• Doesn't account for debt or growth prospects