The price-to-earnings ratio, or P/E ratio, compares a company's share price with its earnings per share. A simple formula is: P/E = market price per share divided by earnings per share.
Interpretation
A higher P/E may reflect higher growth expectations, while a lower P/E may reflect lower expectations or additional risk. Comparing a company with similar businesses is usually more useful than comparing unrelated sectors.
Use carefully
P/E can be less meaningful when earnings are negative, unusually high, or affected by one-time events. Combine it with business, cash-flow, debt, and growth analysis.
