Price-to-Earnings (P/E): Definition, Formula, and How to Calculate It
P/E ratio measures how much investors are willing to pay per dollar of earnings. It is commonly used to compare valuation across companies or industries.
Exact Formula:
Use EPS (TTM) for trailing P/E and forward EPS for forward P/E comparisons.
Notes
- High P/E can indicate expectation of future growth or overvaluation
- P/E is less useful for companies with negative earnings
- Industry comparison is crucial for context
Why This Matters:
P/E ratio is one of the most widely used valuation metrics. It quickly shows how expensive a stock is relative to its earnings and helps investors compare companies within the same industry. However, it should be used alongside other metrics for complete analysis.