Price-to-Earnings Ratio (P/E)
A valuation ratio calculated by dividing a company's current stock price by its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings.
The price-to-earnings ratio (P/E) is the most widely used equity valuation metric. It represents the multiple investors are paying for a company's earnings. A P/E of 20 means investors pay $20 for every $1 of annual earnings.
Types of P/E Ratios
- Trailing P/E — Uses actual earnings from the past 12 months. More objective but backward-looking.
- Forward P/E — Uses analysts' earnings estimates for the next 12 months. More relevant but relies on forecasts.
- CAPE (Shiller P/E) — Uses inflation-adjusted earnings averaged over 10 years. Smooths out business cycle effects.
P/E ratios vary widely by sector and growth expectations. High-growth technology companies often trade at P/E ratios of 30–50 or more, while mature value stocks may trade at 10–15. The P/E ratio is most useful when compared against a company's historical range, its sector peers, or the broader market. Combine it with other metrics and factor analysis for a more complete picture.