Price-to-Earnings Ratio

What is P/E Ratio?

The P/E Ratio compares a stock's price to its earnings per share. It shows how much investors are willing to pay for each dollar of earnings. A high P/E might mean the stock is overvalued or that investors expect high growth.

Think of it like this

Imagine buying a lemonade stand. If it makes $100/year profit and costs $1,000, the P/E is 10. You're paying 10 times the annual profit. Would you pay $3,000 (P/E of 30) for the same $100 profit? Only if you think profits will grow!

Formula

P/E = Stock Price / Earnings Per Share

Why it matters

  • Shows if stock is expensive or cheap relative to earnings
  • Compare stocks in same industry
  • Lower P/E might mean bargain (or troubled company)
  • Higher P/E might mean growth expectations (or overvalued)

Real-world example

Apple P/E: 30 - investors pay $30 for $1 earnings, expecting growth. Ford P/E: 8 - cheaper but slower growth expected. Amazon P/E: 60 - high growth expectations.

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This is educational content, not financial advice.