Which ratio compares a company's share price to its earnings per share?

The price-to-earnings ratio compares a company’s share price with its earnings per share.

Usually written as P/E, the ratio is calculated by dividing the market price of one share by earnings per share, or EPS. It helps investors compare how much the market is paying for each unit of a company’s reported earnings. A P/E of 15, for example, means the share price is 15 times annual EPS.

A trailing P/E uses earnings from the previous 12 months, while a forward P/E uses estimated future earnings. Companies reporting losses generally have no meaningful conventional P/E, so financial websites often display “N/A.” A high P/E can reflect expectations of strong growth, but it can also reflect low interest rates, optimism, or temporarily depressed earnings.

This ratio is often confused with price-to-sales, which uses revenue, and price-to-book, which uses book value. P/E is not a guaranteed payback period: earnings can change, and the market multiple can expand or contract.