Valuation Metrics
P/E Ratio
Price to Earnings Ratio
Definition
Stock Price ÷ Earnings Per Share = How many years of earnings equal the price
Explanation
The P/E ratio shows how much investors are willing to pay for each dollar of earnings. A P/E of 20 means you're paying $20 for every $1 of annual profit. Lower P/E might indicate undervaluation, higher P/E could mean overvaluation—but different industries have different "normal" P/E ranges.
Example
Stock price $100, EPS $5 → P/E = 20x