What is the 'Price-Earnings Ratio - P/E Ratio'?

The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple. 

The P/E ratio can be calculated as: Market Value per Share / Earnings per Share

BREAKING DOWN 'Price-Earnings Ratio - P/E Ratio'

In essence, the price-earnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price multiple because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

[ Price-earnings ratios are the most popular way to assign a relative value to a stock, but there are many other techniques that investors use to make decisions. If you're interested in learning more about investing, Investopedia's Investing for Beginners Course provides an in-depth introduction to the topic guided by a Chartered Financial Analyst. You'll learn the basics, how to manage your portfolio, techniques for reducing risk, and how to make informed decisions in over 75 lessons containing on-demand video, exercises, and interactive content. ]

Source: Investopedia