P/E Ratio
Share price divided by earnings per share. The P/E tells you how many dollars investors pay for each dollar of earnings.
Formula
P/E = Share Price ÷ Earnings Per Share
The price-to-earnings ratio is the most-used equity valuation multiple. A P/E of 20 means investors are paying $20 for every $1 of annual earnings — effectively, a 20-year payback if earnings stay flat.
Trailing P/E uses the last 12 months of reported EPS. Forward P/E uses the next 12 months of consensus estimates and is more useful for growth stocks. A high P/E signals the market expects strong earnings growth; a low P/E can mean value or deteriorating fundamentals.
P/E is meaningless for companies with negative earnings, and comparisons only make sense within the same sector — tech stocks structurally command higher P/Es than banks or utilities.
Example
Stock trades at $50. Trailing EPS is $2.50. Trailing P/E = 50 ÷ 2.50 = 20×. The sector average is 15×, suggesting the stock trades at a premium — justified only if earnings growth exceeds peers.
Related Terms
Book Value
Total assets minus total liabilities on the balance sheet — what shareholders would theoretically receive if the company were liquidated today.
IntermediateEarnings Report
A company's official quarterly disclosure of revenue, earnings, margins, and guidance. The biggest recurring event in single-stock trading.
BeginnerEnterprise Value (EV)
The total cost to acquire a business outright: market cap plus net debt. The true takeover price, capital-structure-neutral.
IntermediateEPS (Earnings Per Share)
Net income divided by shares outstanding. EPS is the single most-watched earnings metric for valuing a stock.
BeginnerForward Guidance
Management's public forecast for future revenue, earnings, or margins. Often moves the stock more than the reported quarter itself.
IntermediatePEG Ratio
P/E ratio divided by the expected annual EPS growth rate. Adjusts valuation for growth — a PEG near 1.0 is often seen as fair value.
IntermediatePrice-to-Book (P/B) Ratio
Share price divided by book value per share. Shows how much you pay per dollar of accounting net worth.
IntermediatePrice-to-Sales (P/S) Ratio
Market cap divided by annual revenue. A valuation multiple that works even when a company has no earnings.
IntermediateRevenue
The total income a company generates from its business activities before any costs are deducted. The "top line" of the income statement.
Beginner