Price-to-Earnings Ratio

Price-to-earnings ratio means a stock’s price compared with its earnings per share. In simple terms, it shows how much investors are paying for each dollar of earnings. The price-to-earnings ratio is important because investors use it to judge whether a stock looks expensive or cheap compared with earnings. A higher ratio may suggest higher growth expectations or a more expensive valuation. For example, if a stock trades at $100 and its EPS is $5, its price-to-earnings ratio is 20. Price-to-earnings ratio is not enough by itself. Investors also need to consider growth, margins, risk, interest rates, and the company’s business quality.