P/E ratio

P/E ratio, or price/earnings ratio, is a standard fundamental metric used to value stocks. It is defined as market price per share divided by annual earnings per share.

The most common version uses net income for the last four quarters available, divided by the weighted average number of common shares in issue during the period.

As an example, if stock A is trading at $24 and the earnings per share for the most recent 12-month period is $3, then stock A has a P/E ratio of 24/3 or 8. Put another way, the purchaser of the stock is paying $8 for every dollar of earnings.

P/E ratio is useful for comparing valuation of peer companies in similar sector or group. Different industries have different average P/E values, or 'multiple'. Value stocks tend to have low multiples, and growth stocks high ones.

The earnings yield is the reciprocal of the P/E ratio.