P/E Ratio
Price-to-Earnings ratio ”” a valuation metric comparing a company's stock price to its earnings per share.
Also: P/E ratio · P/E multiple
Definition
The Price-to-Earnings (P/E) ratio is a valuation metric calculated by dividing a company's current stock price by its earnings per share (EPS). The P/E ratio indicates how much investors are willing to pay for each dollar of earnings. A high P/E suggests the market expects strong future growth (growth stocks typically have high P/Es); a low P/E may indicate an undervalued stock or poor growth prospects. The forward P/E uses projected future earnings. The P/E should be compared to industry peers and historical averages.
Example
“A stock trading at $100 with EPS of $5 has a P/E ratio of 20, meaning investors pay $20 for every $1 of earnings ”” higher than the S&P 500 historical average of ~15-17x.”
Usage Examples
- 1
“The team applied p/e ratio best practices to improve their investment outcomes significantly.”
- 2
“Understanding p/e ratio is essential for anyone building a career in Finance.”
When & How to Use
Use 'P/E Ratio' when working in Investment contexts where the price-to-earnings (p/e) ratio is a valuation metric calculated by dividing a company's current stock price by its earnings per share (eps).
- ▸Applying p/e ratio principles during a investment project or initiative
- ▸Explaining p/e ratio to a junior team member or stakeholder unfamiliar with Finance
- ▸Evaluating options or proposals using p/e ratio as a decision-making criterion
Etymology & Origin
The term 'P/E Ratio' derives from Latin roots and entered Finance professional usage as the field formalised in the 20th century.
History & Evolution
The concept of p/e ratio has evolved alongside Finance. Early practitioners relied on informal methods; structured approaches emerged with the professionalisation of investment in the mid-20th century. Today, p/e ratio is a standard part of Finance practice globally.
Synonyms
- price-to-earnings ratio
- earnings multiple
- price multiple
- valuation multiple
Images
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Related Terms
- eps
- valuation
- stock
- fundamental-analysis