The P/E ratio measures how much investors are willing to pay for each dollar of a company's earnings.
The Price-to-Earnings ratio is one of the most widely used valuation metrics in investing. It compares a company's stock price to its earnings per share, helping investors determine if a stock is overvalued or undervalued relative to its earnings. A higher P/E ratio suggests investors expect higher future growth, while a lower P/E might indicate undervaluation or slower growth prospects.
For example, if a stock trades at $100 and the company earned $5 per share last year, the trailing P/E ratio is 100 / 5 = 20x. This means investors are paying $20 for every $1 of earnings.
A high P/E ratio (above 25-30) typically indicates that investors expect significant future growth or the company operates in a high-growth sector like technology.
A low P/E ratio (below 10-15) might suggest the stock is undervalued, the company has slower growth prospects, or there are concerns about future earnings.
The "ideal" P/E varies by sector. Technology companies often trade at P/E ratios of 30-50x, while mature industries like utilities might have P/E ratios of 10-15x.
