P/E Ratio (Price-to-Earnings)

The price-to-earnings ratio, or P/E ratio, compares a company's share price to how much profit it earns per share. It's one of the most commonly quoted numbers for getting a rough sense of how expensive a stock looks relative to its actual earnings.

The formula divides the current share price by earnings per share, or EPS: the company's profit divided across every share outstanding. A P/E of 20 means investors are currently paying $20 for every $1 of the company's annual earnings.

P/E Ratio = Share Price / Earnings Per Share

Share price:          $60
Earnings per share:    $3
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P/E = $60 / $3 = 20

The P/E ratio divides a company's share price by its earnings ____ share.

A high P/E can mean investors expect strong future growth, or it can mean the stock is simply overpriced relative to what the company actually earns right now — the number alone can't tell you which. A low P/E can mean a genuine bargain, or it can mean the market has real doubts about the company's future earnings. P/E is a useful starting question, never a final answer, and it's most meaningful when compared against similar companies in the same industry.

A stock trades at $90 per share with earnings per share of $6. What is its P/E ratio?

A high P/E ratio always means a stock is a bad investment.