Valuation
P/E Ratio (Price-to-Earnings)
A stock's share price divided by its earnings per share — a common, though imperfect, valuation metric.
Example
A stock trading at $100 with $5 in annual earnings per share has a P/E ratio of 20 — investors are paying $20 for every $1 of current annual profit.
Common Misconception
A "low" P/E isn't automatically a bargain, and a "high" P/E isn't automatically overpriced — P/E needs to be compared against a company's own history and its industry peers, since growth and mature companies trade at structurally different multiples.
Why It Matters
P/E is one of the most commonly cited valuation shortcuts, but it's most useful alongside other metrics like earnings growth rate, since it says nothing on its own about whether that growth is accelerating or slowing.