price-to-earnings (P/E) ratio tells you

Ever wondered how much you're paying for a company's earnings?

Imagine you're buying a house and want to know if it's a good deal. You compare the price to the expected income from renting it out.

Think of the price-to-earnings (P/E) ratio as a way to compare the price of a company's stock to its earnings. It's like checking if you're getting a good deal on that house by comparing its price to the rent you'd earn.

Example

If a company's stock is 100 and its earnings per share are 10, the P/E ratio is 10 (100/10).

Remember this

The P/E ratio helps you decide if a stock is overvalued or undervalued by comparing its price to the earnings it generates.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

Related concepts

Cyclically adjusted price-to-earnings ratio

Price-to-Earnings Ratio (P/E) measures market value relative to earnings

Earnings per share

Earnings per share (EPS) = Net income / Shares outstanding

Sortino ratio

Ever wondered how to compare investments fairly, considering their risks?

Risk premium

Why do some investments pay more than others?

Graham number

Why pay too much for a stock?

Quantity theory of money

MV = PY equation

Educational content, not financial advice.

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