P/E ratio.
In plain English
The price-to-earnings ratio (P/E) is the stock price divided by the company's annual earnings per share (EPS). A stock at $100 with $5 in annual EPS has a P/E of 20, meaning investors are paying $20 for every $1 of current earnings. P/E is the most common valuation shorthand on Wall Street. A low P/E often signals a slower-growing or troubled business; a high P/E often signals expected high growth or an overpriced stock.
01Why it matters
P/E is not a verdict; it is a question. A P/E of 30 deserves the question 'why?' If the answer is 'earnings are about to triple,' the price may be fair. If the answer is 'this stock is hot right now,' the price is probably setting up for a fall. The S&P 500's historical average P/E is around 16 to 17.
02The math, step by step
Apple at a $230 stock price with $6 EPS has a P/E of about 38. A utility company at $80 with $4 EPS has a P/E of 20. The market is paying nearly twice as much per dollar of current earnings for Apple, betting on continued growth.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Trailing P/E uses the last 12 months of actual earnings. Forward P/E uses analysts' estimates of next year's earnings. Forward P/E is typically lower (because earnings are expected to grow) and more useful for fast-changing companies, but also more dependent on the estimates being right.
Plain-English answers from our glossary. Receipts included. Never advice.
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