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

P/E ratio = Share Price / Earnings per Share

The P/E ratio is a fundamental metric used to value companies by comparing their share price to earnings per share. This ratio helps investors determine if a stock is overvalued or undervalued relative to its earnings.

Example

If share A is trading at 24 and the earnings per share for the most recent 12-month period is 3, then share A has a P/E ratio of 8 years.

Remember this

Understanding the P/E ratio is crucial for investors as it provides insights into the valuation of a company and helps make informed investment decisions.

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

Stock

A single share represents fractional ownership of a company

Dividend yield

Dividend yield = Annual dividend / Share price

Stock split

Stock split doubles shares, halves price

Market capitalization

Market capitalization = share price × shares outstanding

Educational content, not financial advice.

Swipe through 100 ML concepts daily

Open Pocket Polymath