Price-to-Earnings Ratio

The Price-to-Earnings (P/E) ratio is a key metric used to evaluate a company's valuation by comparing its stock price to its earnings per share (EPS). It helps investors determine whether a stock is overvalued, undervalued, or fairly priced relative to its earnings.

Formula:

Types of P/E Ratios:

• Trailing P/E: Based on the company's past 12 months of earnings
• Forward P/E: Based on projected future earnings

How to Interpret P/E Ratios:

• High P/E Ratio: Investors expect strong future growth, but the stock may be overpriced
• Low P/E Ratio: The stock may be undervalued, or the company could be struggling
• Comparison Matters: Best analyzed relative to industry peers or historical averages

The P/E ratio is a widely used tool, but it should be considered alongside other financial metrics like growth rate, debt levels, and market conditions for a complete investment analysis.