The P/E ratio, explained simply

P/E compares a share price with the profit behind each share.

Price divided by earnings

The price-to-earnings ratio, or P/E, compares a stock's price with its earnings per share. A P/E of 20 roughly means investors pay $20 for each $1 of annual earnings per share.

It is a comparison tool

A higher P/E can mean investors expect faster growth, while a lower P/E can reflect lower expectations or more risk. Neither label alone says buy or sell.

Know its limits

P/E is less useful when earnings are tiny, negative, or unusual. Compare similar businesses and use more than one measure.

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