P/E Ratio (Price-to-Earnings Ratio)
The P/E ratio is a company's share price divided by its earnings per share, showing how much investors pay for each dollar of profit.
The price-to-earnings ratio is one of the most widely used valuation measures. The formula is the share price divided by earnings per share. It tells you how many dollars investors are paying for one dollar of the company's annual earnings.
Example: a stock trading at $60 with earnings per share of $3 has a P/E of 20. Investors are paying $20 for every $1 of yearly profit.
A high P/E usually means investors expect strong future growth, or that the stock is expensive. A low P/E can signal a bargain, or that investors expect earnings to fall. The ratio is most useful when comparing companies in the same industry or a company with its own history.
The standard, or trailing, P/E uses earnings from the past 12 months. The forward P/E uses analysts' estimates for the next 12 months. The P/E cannot be meaningfully calculated when earnings are zero or negative, and one-time gains or losses can distort it.
The inverse of the P/E is the earnings yield. A P/E of 20 corresponds to an earnings yield of 5%, which some investors compare with bond yields.