How is the price-earnings (P/E) ratio calculated?

The price-earnings (P/E) ratio is a key financial metric used to evaluate a company's valuation relative to its earnings. It is calculated by dividing the market price per share of the company's stock by the earnings per share (EPS). This ratio provides investors with insight into how much they are willing to pay for each dollar of earnings. A higher P/E ratio may indicate that the market expects future growth and earnings expansion, while a lower P/E might suggest the opposite.

The market price per share reflects what investors pay for a single share of the company's stock in the open market, and earnings per share measures the company's profitability on a per-share basis. By comparing these two figures, investors can gauge whether a stock is overvalued, undervalued, or fairly valued based on its earnings potential.

Understanding this relationship allows investors and analysts to make more informed decisions regarding investment opportunities, making the P/E ratio a crucial tool in financial analysis.