The price-to-earnings ratio, or p/e ratio, is a financial metric used to assess the relative value of a company's shares. It is calculated by dividing the current share price by the earnings per share (EPS), providing insight into how much investors are willing to pay for each dollar of earnings. This ratio is particularly significant in the context of mergers and acquisitions as it helps potential buyers evaluate a target company's market valuation relative to its earnings, assisting in determining if the purchase price aligns with expected future profitability.
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