P/EPrice-to-Earnings Ratio
How much investors pay per dollar of earnings. The most common valuation metric — tells you if a stock is "expensive" or "cheap" relative to its profits.
Formula
P/E = Share Price / Earnings Per Share
How to Interpret
S&P 500 average is ~20-25x. High P/E (>30) means investors expect high future growth. Low P/E (<15) might mean undervaluation or declining business. Negative P/E (unprofitable companies) is meaningless — use P/S instead.
Why It Matters
P/E is the quick-and-dirty valuation check. Is Nvidia at 60x P/E expensive? Not if earnings double. Is a bank at 8x P/E cheap? Not if earnings are about to collapse. P/E is only useful in context.
Example
If a stock trades at $100 and EPS is $5, the P/E is 20x. Investors pay $20 for every $1 of earnings.