What does P/E Ratio mean?

The price-to-earnings (P/E) ratio is a stock's share price divided by its earnings per share — a P/E of 20 means investors pay $20 today for every $1 of yearly profit.

Price-to-earnings ratio = share price ÷ earnings per share. A P/E of 20 means investors pay $20 today for every $1 of yearly profit. Higher P/E often means investors expect strong future growth — but it can also signal overvaluation.

P/E Ratio example

A stock at $60 with earnings of $3 per share over the past year has a P/E of 20 — investors pay $20 for each $1 of yearly profit. If earnings grow to $4 while the price stays at $60, the P/E falls to 15.

Common beginner mistake

Calling a low P/E "cheap" without asking why. Earnings that are about to fall can make a stock look cheap right before the profit disappears.