price-earnings ratio

A price multiple used to gauge market expectation of future performance by relating a stock’s current share price to its earnings per share. A price-earnings (P/E) ratio of 25 means that investors are paying $25 for each $1 of earnings. Variations on price-earnings ratios are created by changing the share price used (current or average) and the earnings per share number used (trailing 12 months, expected future, basic versus diluted or continuing, etc.). A high price-earnings ratio generally means the market believes that the company has strong future growth prospects. A low price-earnings ratio generally means that the market has low earnings growth expectations for the firm or there is high risk or uncertainty of the firm actually achieving growth. It is useful to compare the price-earnings ratios of one company to those of other companies in the same industry and to the market in general. Also, tracking a stock’s price-earnings ratio over time is useful in determining how the current valuation compares to historical trends.