Price-to-Earnings Ratio (P/E)

The Price-to-Earnings ratio, or P/E ratio, is one of the most widely used stock valuation metrics. It divides the current stock price by earnings per share (EPS), showing how much investors are willing to pay for each dollar the company earns.

A P/E of 25 means investors pay $25 for every $1 of annual earnings. Higher P/E ratios generally indicate that investors expect higher future growth, while lower P/E ratios may suggest the stock is undervalued or that growth expectations are modest.

Trailing vs Forward P/E

Trailing P/E uses the past 12 months of actual earnings, providing a concrete historical measure. Forward P/E uses projected earnings for the next 12 months, reflecting market expectations. Both have value: trailing P/E is factual but backward-looking, while forward P/E is forward-looking but based on estimates.

P/E ratios are most useful when compared against sector averages. A technology company with a P/E of 30 might be fairly valued if the sector average is 28, but the same P/E would be expensive for a utility company where the sector average is 15.