Investing & Markets

What is P/E Ratio?

The P/E ratio compares a company’s share price to its earnings per share. It tells you how much investors are willing to pay for each dollar of earnings. It is calculated by dividing the company's current market price per share by its annual earnings per share (EPS). P/E represents the price investors pay for $1 of corporate earnings.

Proportions are categorized as trailing P/E (calculated using the actual earnings of the past 12 months) or forward P/E (calculated using projected future earnings). A high P/E ratio suggests that investors expect high future growth, while a low P/E can represent undervaluation or structural challenges.

P/E ratios vary by sector. Technology companies often carry high P/E ratios due to high growth expectations, while utility companies carry lower P/E ratios. Investors should compare a company's P/E to its historical average and its industry peers to evaluate valuation.

Quick Facts

FormulaShare Price ÷ Earnings Per Share (EPS)

Trailing P/EValuation based on the past 12 months of actual earnings

Forward P/EValuation based on the next 12 months of projected earnings

Industry VariationGrowth sectors carry higher P/E ratios than value sectors

PRACTICAL EXAMPLE

A company's stock is trading at $50 per share, and its earnings per share for the past year was $2.50. The company's trailing P/E ratio is 20 ($50 ÷ $2.50), meaning investors are willing to pay $20 for every $1 of earnings.

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StockA financial security representing a fractional share of ownership in a corporation, conveying voting rights and claims on assets.

Market CapitalizationThe total market value of a public company's outstanding shares of stock, indicating company size.

YieldThe income return on an investment, expressed as an annual percentage based on the asset's cost or market value.

ROIA performance measure used to evaluate the efficiency or profitability of an investment relative to its cost.

DividendA distribution of a portion of a corporation's earnings to its shareholders, typically paid in cash or additional shares.

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