Fundamental analysis
Price-to-earnings ratio (P/E)
Definition
The P/E ratio divides a stock's price by its earnings per share: a $50 stock earning $2.50 a share has a P/E of 20, meaning investors pay $20 for each dollar of annual earnings. Trailing P/E uses the last 12 months of reported earnings, while forward P/E uses analysts' estimates. See our guide to the P/E ratio.
Example
Suppose a $60 stock earned $3.00 a share over the last 12 months, giving it a trailing P/E of 20. If analysts expect $4.00 a share next year, its forward P/E is 15, so the stock looks cheaper on forward numbers, but only if that estimate proves right. Had the company lost money, the P/E would mean nothing.
Hypothetical numbers, for illustration only.
Also defined in
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