Price-to-Earnings (P/E) Ratio
Measures how much investors pay per dollar of earnings.
Definition
The price-to-earnings ratio compares a company's stock price to its earnings per share. It is one of the most widely used valuation metrics and helps investors gauge whether a stock is overvalued or undervalued relative to its earnings power. A higher P/E may indicate growth expectations, while a lower P/E may suggest undervaluation or declining prospects.
Formula
P/E = Stock Price / Earnings Per Share (EPS)
Why It Matters
P/E ratios let you compare valuations across companies in the same sector. For banks, P/E ratios tend to be lower than tech stocks due to the cyclical nature of banking earnings and higher regulatory capital requirements.