Definition

The PE Ratio often used to determine if a company is under or overvalued.  The brief technical definition for the PE (Price to Earnings) Ratio is that it relates a company's share price to its earnings per share. Another way of looking at it is, the PE Ratio determines how much money it could potentially cost an investor for every $1 of company profit.

Calculation

PE Ratio = Current Price / Earnings Per Share

Why is it Important?

PE ratios are a good way to gauge market expectations.  Higher PE Ratios are generally given to high-growth companies.  Lower PE Ratios are more appropriate for stable and reasonable growth companies.  Companies that have business issues or limited growth prospect tend to have the lowest PE Ratios.