How is the price-to-earnings (P/E) ratio defined?

The price-to-earnings (P/E) ratio is defined as the market price per share divided by earnings per share. This ratio is a key financial metric used by investors to evaluate the valuation of a company's stock.

When the market price per share is divided by the earnings per share, it provides insight into how much investors are willing to pay per dollar of earnings. A higher P/E ratio might indicate that investors expect higher growth in the future and are thus willing to pay more for each unit of earnings, while a lower P/E ratio may suggest that the stock is undervalued or that the company is experiencing financial difficulties.

This metric is particularly useful for comparing the valuation of different companies within the same industry or assessing the stock price trends over time. Understanding the P/E ratio can help investors make informed decisions about buying or selling stocks based on their valuations relative to earnings performance.