P/E Ratio (Price-to-Earnings)

Definition

The Price-to-Earnings (P/E) ratio is one of the most widely used metrics for valuing stocks. It is calculated by dividing the current stock price by earnings per share (EPS). A P/E of 20 means investors are paying $20 for every $1 of earnings. The trailing P/E uses actual past earnings, while the forward P/E uses estimated future earnings. A high P/E may indicate that a stock is overvalued or that investors expect high growth. A low P/E may suggest undervaluation or declining prospects. The average S&P 500 P/E ratio has historically been around 15-17. P/E ratios vary significantly by industry.