The P/E ratio compares a company’s share price with its earnings per share.
P/E stands for price-to-earnings. It can be calculated by dividing the market price per share by earnings per share. If a stock trades at $40 and reports $2 in earnings per share, its P/E ratio is 20.
Investors often use the ratio to compare a company’s valuation with its own history, competitors, or a broader market. A high P/E may reflect expectations of stronger future growth, while a low P/E can reflect slower growth, risk, or temporary problems.
P/E ratios require context. Companies with negative earnings do not have a meaningful ordinary positive P/E, and accounting methods, business cycles, and one-time gains can affect earnings. The ratio is not a guaranteed forecast of future returns.