P/E ratio
Principles of Finance glossary · Cost of Capital & Capital Structure
Definition
Price per share divided by earnings per share; the most common equity-relative valuation multiple.
P/E ratio in plain English
"Earnings" are a company's profit; earnings per share is that profit split across each share of stock. The P/E ratio is the stock's price divided by those per-share earnings, and it roughly tells you how many years of current profit you're paying for up front. A P/E of 20 means you pay $20 for every $1 of yearly profit — a high number usually signals investors expect profits to grow fast. It's like buying a lemonade stand that earns $100 a year for $2,000: you're betting it'll earn much more over time, or you overpaid.
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