Understanding P/E Ratio

The definitive guide to valuing stocks.

Price-to-Earnings Ratio (P/E) is one of the most widely used metrics for investors to determine stock valuation. It shows how much investors are willing to pay for one dollar of a company's earnings.

How to Calculate?

The formula is simple:

P/E Ratio = Market Value per Share / Earnings per Share (EPS)

What Does it Mean?

• High P/E: Suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, it might also mean the stock is overvalued.
• Low P/E: Can indicate that the stock is undervalued or that the company is doing exceptionally well relative to its past trends. It could also mean investors are not confident about the company's future.

Remember, comparing P/E ratios is most effective when analyzing companies within the same industry.