Price-Earnings Ratio

Short definition: The Price-Earnings Ratio (P/E Ratio) is a valuation metric that compares a company’s current share price to its earnings per share (EPS).

Explanation: It is a widely used indicator to assess whether a company’s stock is overvalued or undervalued relative to its earnings. A high P/E ratio suggests that investors are willing to pay a premium for each dollar of earnings, potentially indicating high growth expectations. Conversely, a low P/E ratio might suggest that the stock is undervalued or that investors have lower growth expectations.

Example: If a company’s share price is $50 and its earnings per share (EPS) is $5, its P/E ratio is 10 ($50 / $5 = 10).

Additional information (optional): P/E ratios can vary significantly across industries and companies. It’s essential to compare P/E ratios within the same industry or sector to gain meaningful insights. Additionally, investors should consider other factors, such as growth prospects, financial health, and industry trends, when evaluating a company’s valuation using the P/E ratio.