What is Price-to-Earnings Ratio (P/E)?
The Price-to-Earnings ratio (P/E) divides a company's stock price by its earnings per share (EPS). It tells you how many dollars investors are willing to pay today for one dollar of the company's current earnings. A P/E of 20 means investors are paying $20 for every $1 of annual earnings. Compare P/E ratios within the same industry — what's expensive for a bank is cheap for a software company.
Formula
P/E = Share Price ÷ Earnings Per Share
How TopTier Strategy uses Price-to-Earnings Ratio (P/E)
TopTier Strategy uses P/E as one of several inputs to the Valuation pillar, alongside EV/EBITDA, P/B, and free cash flow yield. We compare a company's P/E to its sector median and its own history to flag whether a stock is trading rich or cheap.
Related Glossary Terms
Other concepts in the Valuation pillar.
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