Price to Earnings (P/E) Ratio

Definition

The P/E Ratio relates a company's share price to its earnings per share (EPS). Another way of looking at it is, the P/E determines how much money it could cost an investor for every $1 of company profit.

Calculation

PE Ratio = Current Price / Earnings Per Share (EPS)

Why is it Important?

The PE Ratio helps determine if a company is under or overvalued, and a way to gauge market expectations.  High growth companies tend to have higher PE ratios. Whereas more stable companies with reasonable growth tend to have lower PE ratios.  Lastly, companies that have business issues or limited growth prospects often have the lowest PE Ratios.

Financial Glossary Reference

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