A stock’s price divided by its earnings per share is its P/E ratio.
The price-to-earnings ratio compares what investors pay for one share with the earnings attributable to that share. It is calculated as market price per share divided by earnings per share, or EPS. For example, a stock priced at $50 with annual EPS of $5 has a P/E ratio of 10.
Investors commonly use the ratio to compare companies in the same industry or to compare a company’s valuation with its own history. A high P/E can indicate that investors expect stronger future growth, while a low P/E can reflect pessimism, lower growth expectations, unusual earnings, or greater perceived risk. The number is not a verdict by itself.
P/E can be based on trailing earnings from the past year or forward earnings estimates. A company with zero or negative earnings may have no meaningful conventional P/E, which is why the ratio should not be confused with EPS, return on equity, or return on investment.