What is the P/E Ratio?

If you're new to investing or an experienced investor, one term you should either be acquainted with or have heard of by now is the P/E (Price to Earnings)  Ratio. Even though you've heard of it you still may be asking yourself: what is it? What does it mean? Why should I care?

The brief technical definition for the P/E Ratio is that it relates a company's share price to its earnings per share. Another way of looking at it is, the P/E Ratio determines how much money it could potentially cost an investor for every $1 of company profit.

Let's go through an example to help visualize how P/E is determined:

Looking at Company A, we see that they have a current share price of  $50 and an EPS (earnings per share) of $2. To calculate P/E we would now take the current share price ($50) divided by the EPS ($2) to get a P/E ratio of $25.

The P/E ratio of $25 for Company A means that for every $25 invested, investors could earn $2 of profit. In other words, Company A is trading at 25 times its earnings.

Applying P/E Ratio when analyzing a stock

The P/E ratio give investors insight into how much the market is willing to pay for a slice of the profit pie, and it can help investors understand how a company stacks up against its' peers when it comes to being overvalued, undervalued, or on par.

PE Ratio is available on our Basic (free) plan for Screeners and comparative analysis using our heatmaps. Check it out in the app!