Price-to-earnings ratio (P/E).
In plain English
The price-to-earnings ratio compares a company's share price to how much it earns per share. A P/E of 20 means investors are paying $20 for every $1 of annual profit. A higher P/E usually means the market expects strong future growth; a lower P/E can mean modest expectations or a company that is out of favor. It is a quick way to gauge how expensive a stock is relative to what it actually earns, but it says nothing on its own about whether the price is justified.
01Why it matters
P/E is the most common shorthand for whether a stock looks cheap or expensive, and comparing a company's P/E to its industry is a fast first sanity check.
02The math, step by step
A company earning $5 per share with a stock price of $100 has a P/E of 20. If a competitor earning the same $5 trades at $150, its P/E is 30, meaning investors are paying more for the same dollar of earnings, usually because they expect faster growth.
03What this is NOT
A high P/E does not mean a stock is expensive in dollars, and a low P/E does not mean it is cheap. P/E measures price relative to earnings, not the share price alone.
04Receipts
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