What is the price-to-earnings (P/E) ratio?

What is the price-to-earnings (P/E) ratio?

The price-to-earnings (P/E) ratio is the proportion of a company's share price to its earnings per share.

It helps to determine whether a stock is overvalued or undervalued. A company's P/E can also be benchmarked against other stocks in the same industry or against the broader market, such as the S&P 500 Index.

P/E Ratio = (Current Market Price of a Share / Earnings per Share)

There are primarily two types of P/E Ratio which investors take into consideration – forward P/E ratio and trailing P/E ratio. Both these types of P/E Ratio depend on the nature of earnings.

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