Legal Definitions - price-earnings ratio

The price-earnings ratio (P/E ratio) is a financial metric used to evaluate a company's stock price. It is calculated by dividing the current market price of a stock by the earnings per share (EPS) of the company over the last year.

For example, if a company's stock is currently trading at $50 per share and its EPS for the last year was $5, then the P/E ratio would be 10 ($50/$5).

The P/E ratio is often used by investors to determine whether a stock is overvalued or undervalued. A high P/E ratio may indicate that a stock is overpriced, while a low P/E ratio may suggest that a stock is undervalued.

However, it is important to note that the P/E ratio should not be used as the sole indicator of a stock's value. Other factors, such as the company's financial health, growth potential, and industry trends, should also be considered.

Overall, the P/E ratio is a useful tool for investors to evaluate a company's stock price and make informed investment decisions.