P/E Ratio (Price-to-Earnings)
Definition
A stock's current price divided by its earnings per share. If a stock costs $100 and earns $5 per share annually, its P/E is 20. It tells you how much investors are willing to pay for each dollar of earnings. Higher P/E = investors expect more growth. Lower P/E = cheaper but potentially less growth.
Why It Matters
P/E ratio helps you gauge whether a stock is expensive or cheap relative to its earnings. The S&P 500 historically averages a P/E around 15-20. A P/E of 50+ means investors have sky-high expectations. A P/E below 10 might signal a bargain or a company in trouble.
Example
Apple at a P/E of 30 means investors pay $30 for every $1 of Apple's earnings. A utility company at P/E of 12 means you pay $12 per dollar of earnings. Apple's higher P/E reflects expectations of faster growth.