Price-to-Earnings Ratio (P/E)
The P/E ratio measures a company's current share price relative to its earnings per share (EPS).
Concept map
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Definition
The P/E ratio measures a company's current share price relative to its earnings per share (EPS).
Use case
Used in equity analysis workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Price-to-Earnings Ratio (P/E)
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.