Understanding the P/E ratio: a fundamental metric

The Price-to-Earnings (P/E) ratio is a key metric used by investors to determine if a stock is overvalued or undervalued.

What is P/E ratio?

It is the ratio of a company's share price to its earnings per share (EPS).

Formula: P/E = Market Value per Share / Earnings per Share (EPS)

Interpreting the P/E ratio

• High P/E: Investors expect higher earnings growth in the future compared to companies with a lower P/E. It could also mean the stock is overvalued.
• Low P/E: The company may be undervalued, or investors are expecting earnings to fall.

Types of P/E

1. Trailing P/E: Based on the last 12 months of earnings.
2. Forward P/E: Based on estimated future earnings.

The P/E ratio is best used when comparing companies within the same industry.