What it is
The price-to-earnings (P/E) ratio, also known as the earnings multiple, is calculated by dividing a company's current stock price by its earnings per share (EPS) over the past 12 months. It indicates how much investors are willing to pay for each dollar of a company's earnings. A high P/E ratio suggests investors expect higher earnings growth in the future, while a low P/E might indicate a company is undervalued or has limited growth prospects.
Investors and analysts use the P/E ratio to compare a company's valuation against its historical P/E, competitors, or the broader market. A rising P/E can signal increased investor confidence, potentially driving the stock price up. Conversely, a falling P/E might suggest concerns about future earnings or overvaluation. It's often discussed in earnings reports and analyst upgrades/downgrades.
Why it matters
The P/E ratio helps you assess if a stock is cheap or expensive relative to its earnings. It's a fundamental tool for comparing investment opportunities.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice