Quick Definition

The Price-to-Earnings Ratio (P/E Ratio) is a valuation metric used to assess how much investors are paying for a dollar of a company's earnings.

Formula

Examples

• 1A company with a stock price of $50 and earnings per share of $5 has a P/E Ratio of 10.
• 2If a company's stock price increases to $60 while its earnings per share remain at $5, the P/E Ratio rises to 12, indicating a higher valuation.
• 3Comparing two companies in the same industry, one with a P/E Ratio of 15 and another with 25, suggests that the market values the latter more highly, possibly due to better growth prospects.

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