The P/E ratio is the most quoted number in investing: it tells you how many dollars you're paying for each dollar of a company's annual profit — a quick gauge of whether a stock looks cheap or expensive.
The price-to-earnings (P/E) ratio divides a stock's share price by its earnings per share (EPS). A P/E of 20 means investors are paying $20 for every $1 of annual profit the company makes. It is the cornerstone of fundamental analysis and the fastest way to compare valuations.
The formula: P/E Ratio = Share Price ÷ Earnings Per Share (EPS). A $100 stock earning $5 per share has a P/E of 100 ÷ 5 = 20.
A high P/E means the market expects strong future growth and is willing to pay up for it — common for fast-growing tech. A low P/E can mean a stock is cheap and overlooked, or that the market expects its earnings to shrink. P/E alone never tells you which; context is everything.
Trailing P/E uses the last 12 months of actual earnings — real but backward-looking. Forward P/E uses analysts' estimated future earnings — more relevant but only as good as the forecast. Comparing the two shows whether earnings are expected to grow or shrink.
P/E is most useful relative — versus the company's own history, its industry peers, or the market average. It breaks down for companies with no profits (a negative or meaningless P/E) and ignores debt and growth rate, so pair it with other tools like market cap and earnings growth.
Practice valuing companies: in the stock market simulator you weigh price against value across ten tickers — the same judgment the P/E ratio is built to help with.
Not advice: educational content only. For authoritative basics see the SEC at investor.gov.
Related: fundamental analysis basics, what is market cap, and how to pick stocks.
The P/E ratio is a stock's price divided by its earnings per share. A P/E of 20 means you pay $20 for every $1 of the company's annual profit.
Divide the share price by the earnings per share (EPS). A $100 stock that earns $5 per share has a P/E of 20.
Neither on its own. A high P/E signals high growth expectations and a low P/E can mean a bargain or expected decline. P/E only makes sense compared to peers, history or the market.
Trailing P/E uses the past 12 months of actual earnings, while forward P/E uses analysts' estimated future earnings. Comparing them shows whether earnings are expected to grow or fall.