A valuation metric comparing a stock's price to its earnings per share.
The price-to-earnings ratio (P/E) is a stock valuation metric calculated as stock price divided by annual earnings per share. For example, if a stock trades at $100 and earns $5 per share annually, its P/E is 20 (meaning investors pay $20 for every $1 of earnings). A lower P/E might suggest undervaluation; a higher P/E might suggest overvaluation or high growth expectations. P/E is useful for comparing companies in the same industry and evaluating whether a stock is expensive or cheap. The S&P 500 historical average P/E is around 16–18; significantly higher suggests possible overvaluation, while lower suggests undervaluation or depressed earnings. P/E has limitations—it doesn't account for growth rates, debt levels, or quality of earnings. Using P/E alongside other metrics provides better investment assessment.