Glossary
From A to Z all the terms you need to skip the jargon and get started!
P/E ratio (Price-to-Earnings ratio)
The P/E ratio (Price-to-Earnings ratio) is a valuation ratio widely used in stock analysis, calculated by dividing the market price of a share by its earnings per share (EPS).
It helps investors gauge the relative value of a company's stock, providing a quick snapshot of how much they are willing to pay for each dollar of earnings generated. A high P/E ratio suggests that the market expects strong future growth, while a low P/E ratio may indicate undervaluation or a lack of growth potential. 📈💰
For example, if a company's stock is trading at $50 per share and its EPS is $5, the P/E ratio is 10 ($50 / $5).
Fun fact: The P/E ratio was popularised by Benjamin Graham, the "father of value investing" and mentor of Warren Buffett. Graham advocated for a disciplined approach to investing, including the use of P/E ratios to identify undervalued stocks. 🧐📚