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When buying a stock, price isn’t the only number to watch. Price-to-earnings (P/E) is a key metric for investors. Learn more in the MoneySense Glossary.
The price-to-earnings, or P/E ratio, is used for valuing a company. It measures the company’s current share price relative to its earnings per share (EPS). The P/E ratio formula is: Earnings per share divided by market value per share.
P/E ratios help investors make apples-to-apples comparisons between different stocks and companies. Investors also use P/E ratios to determine if a company is over- or undervalued. Companies with a high P/E ratio may be considered growth stocks with future earnings growth, but are also often more volatile and can be interpreted as overvalued. Companies with a low P/E ratio may be considered value stocks and are often undervalued.
Example: “The price-to-earnings ratio of the company has come down, from a peak in February 2020.“
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