The price-to-earnings ratio (P/E ratio) is a ratio used for valuing companies and determining whether they are overvalued or undervalued. It is the ratio of a companys share price to the companys earnings per share. The P/E ratio is used by investors and analysts to determine the relative value of a companys shares in comparison to others in the same sector. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. The P/E ratio can be estimated on a trailing (backward-looking) or forward (projected) basis.
To calculate the P/E ratio, divide the price of a stock by the companys annual earnings per share. For example, if a stock is trading at $20 per share and its earnings per share are $1, then the stock has a P/E of 20 ($20/$1) . A high P/E ratio could mean that a companys stock is overvalued, or it could indicate that investors have high expectations for the companys future growth. Conversely, a low P/E ratio could mean that a companys stock is undervalued, or it could indicate that investors have low expectations for the companys future growth.
