Price-earnings ratio

Definition

The Price-Earnings (P/E) Ratio is a financial metric used to evaluate the valuation of a company's stock. It is calculated by dividing the current market price per share by the earnings per share (EPS).

5 Must Know Facts For Your Next Test

1. The P/E ratio helps investors determine if a stock is overvalued or undervalued compared to its earnings.
2. A high P/E ratio may indicate that investors expect higher future growth, while a low P/E ratio could suggest the opposite.
3. P/E ratios can vary significantly across different industries, making industry comparisons essential.
4. The ratio can be affected by accounting policies and earnings manipulation, so it should be used in conjunction with other financial metrics.
5. In sustainability reporting, understanding the P/E ratio can help stakeholders assess how well a company balances profitability with sustainable practices.

Review Questions

• How do you calculate the Price-Earnings (P/E) Ratio?
• What might a high P/E ratio indicate about a company's future growth expectations?
• Why is it important to compare P/E ratios within the same industry?

Related terms

Earnings Per Share (EPS): EPS measures a company's profit divided by its number of outstanding shares.

Dividend Yield: Dividend yield is the dividend per share divided by the price per share, indicating how much cash flow you're getting for each dollar invested in an equity position.

Market Capitalization: Market capitalization refers to the total market value of a company's outstanding shares of stock.