Price to Earnings Ratio Definition and Explanation

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Quick Definition

Provides a quick way to value a company, measuring how expensive the stock may be.

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Price to Earnings Ratio Formula

Explanation of Price to Earnings Ratio

Also called the PE or P/E ratio, the Price to Earnings Ratio compares the Market Price of Common Stock to the Earnings per Share. This ratio is a quick measure of how “expensive” the stock of a company may be.

Importance of Price to Earnings Ratio

A company’s stock may be heard as being “overvalued” – this ratio is the calculation often behind analyses like that. As the Earnings per Share increases, or the Market Price of Common Stock decrease, the ratio will look better.