What is price-to-earnings ratio?
When buying a stock, price isn’t the only number to watch. Price-to-earnings (P/E) is a key metric for investors. Learn more in the MoneySense Glossary.
The price-to-earnings, or P/E ratio, is used for valuing a company. It measures the company’s current share price relative to its earnings per share (EPS). The P/E ratio formula is: Earnings per share divided by market value per share.
P/E ratios help investors make apples-to-apples comparisons between different stocks and companies. Investors also use P/E ratios to determine if a company is over- or undervalued. Companies with a high P/E ratio may be considered growth stocks with future earnings growth, but are also often more volatile and can be interpreted as overvalued. Companies with a low P/E ratio may be considered value stocks and are often undervalued.
Example: “The price-to-earnings ratio of the company has come down, from a peak in February 2020.“
Read more on the price-to-earnings ratio:
- What P/E can tell you about a stock, and what it can’t
Price-to-earnings ratio is a good (if imperfect) starting point for people who want to determine how expensive a company is. The ratio indicates what investors are willing to pay for every dollar of future earnings. - Why isn’t everyone a value investor?
Despite the evidence that, over the long run, value stocks generate better returns, that isn’t how most people, not even professionals, invest. A professor of finance examines the reasons for our irrational choices.
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