P/E Ratio

Formal

Used for quoted companies. Calculated:- Price per share/Earnings per share. If share price is $10 and the company declares earnings of 50 cents then the P/E ratio is 20. Often stated as, ‘the company is valued at 20 times its annual earnings’. A key market measure for analysts and investors.

Real-world Example

A company's shares trade at $40 and its earnings per share are $2 - a P/E ratio of 20, meaning investors are paying 20 times current earnings, a common shorthand for whether a stock looks expensive or cheap relative to peers.