What Is P/E Ratio?
Price-to-earnings ratio — how much investors pay per dollar of a company's earnings.
The Full Definition
The price-to-earnings (P/E) ratio measures how much investors are willing to pay for every dollar of a company's annual earnings. A P/E of 20 means investors are paying $20 for each $1 of earnings. A high P/E suggests investors expect strong future growth; a low P/E can signal value or declining expectations. The S&P 500 has historically averaged a P/E around 15–20. Context matters: P/E should always be compared to the company's historical average, its industry peers, and the broader market.
Real-World Example
If a stock trades at $100 and earned $5 per share last year, its P/E ratio is 20. A tech company with a P/E of 40 isn't necessarily overpriced — but it means the market expects earnings to grow significantly to justify that price.