Price-Earnings Ratio (P/E)

Price-Earnings Ratio (P/E)

A valuation metric that compares a company’s current share price to its earnings per share, indicating how much investors are willing to pay for each dollar of company earnings.

For example, if a company’s stock trades at $60 per share and it reports earnings of $3 per share over the past year, its trailing P/E ratio would be 20, meaning investors are willing to pay $20 for each dollar of current earnings.

The P/E ratio serves as a fundamental valuation tool for investors. Higher ratios suggest investors expect stronger future growth or have higher confidence in earnings stability. The metric can be calculated using trailing earnings (trailing P/E) or forecasted earnings (forward P/E). While providing a standardized comparison across companies, appropriate P/E levels vary significantly by industry, growth prospects, risk profiles, and interest rate environments. Companies with no earnings or net losses have undefined P/E ratios, requiring alternative valuation methods. Despite its limitations, P/E remains one of the most widely referenced valuation metrics in investment analysis.