What does the price/earnings (P/E) ratio indicate?

The price/earnings (P/E) ratio is a key financial metric that indicates the market value of a company's share relative to its earnings per share. This ratio is calculated by dividing the current market price of a share by its earnings per share (EPS). It provides insight into how much investors are willing to pay for a dollar of earnings, allowing them to assess the valuation of a company's stock. A higher P/E ratio typically suggests that investors anticipate growth in the company's earnings, while a lower ratio might indicate that the stock is undervalued or that the company is facing challenges.

This measure is crucial for comparing the valuation of companies within the same industry or sector, as it helps in identifying whether a stock is overvalued or undervalued based on its earnings potential. Understanding the P/E ratio enables investors to make informed decisions about buying, holding, or selling stocks based on earnings expectations and market sentiment.