Price-to-earnings ratio (P/E ratio)

The price-to-earnings ratio compares how much investors are paying for a company's shares relative to the profit the company generates per share. It is one of the most widely quoted valuation metrics for public companies and a core tool of fundamental analysis.

It is calculated as Price per share / Earnings per share. "Trailing" P/E uses the most recent twelve months of reported earnings; "forward" P/E uses analysts' projected earnings for the next period. A high P/E can mean a stock is expensive, or that the market expects strong future earnings growth; a low P/E can mean a stock is cheap, or that the market expects earnings to decline — the ratio alone does not distinguish between the two.

P/E is used to compare companies within the same industry, to compare a stock to its own historical average, and as a rough sense-check alongside more detailed models such as discounted cash flow. Common pitfalls: the ratio is meaningless or misleading for companies with negative or near-zero earnings, it can be distorted by one-off accounting items, and it says nothing about debt levels, which is why it is often examined alongside multiples of EBITDA that account for capital structure differently.