What Is a P/E Ratio?
The price-to-earnings ratio (P/E ratio) compares a company’s share price to its earnings per share (EPS). It is one of the most commonly used metrics for assessing whether a stock is overvalued, undervalued, or fairly priced.
How to Calculate It
P/E Ratio = Share Price ÷ Earnings Per Share (EPS)
If a stock trades at $100 and the company earned $5 per share, the P/E ratio is 20 — meaning investors are paying $20 for every $1 of earnings.
Trailing vs. Forward P/E
- Trailing P/E: Based on actual earnings over the past 12 months.
- Forward P/E: Based on analyst estimates for the next 12 months — more speculative but more forward-looking.
What Is a “Good” P/E?
Context matters. A high P/E may signal growth expectations; a low P/E may indicate undervaluation or poor prospects. Always compare P/E ratios within the same industry and against historical averages.
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