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Price-to-Earnings Ratio (P/E)

Definition

The P/E ratio measures a company's current share price relative to its earnings per share (EPS).

Explanation

A high P/E may indicate expectations of future growth or that a stock is overvalued. A low P/E could signal undervaluation or declining prospects. The trailing P/E uses past earnings, while forward P/E uses projected earnings. It's most useful when comparing companies within the same industry.

Example

Company A trades at $150/share with EPS of $5. Its P/E ratio is 30x. Competitor B trades at $80/share with EPS of $8, giving a P/E of 10x. This suggests the market expects significantly more growth from Company A.

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