P/E Ratio
The price-to-earnings (P/E) ratio compares a stock's price to its earnings per share. It shows how much investors are willing to pay for each dollar of earnings. Higher P/E suggests growth expectations or overvaluation; lower P/E suggests value or pessimism.
Understanding the Concept
• Forward P/E uses estimated future earnings; trailing P/E uses past earnings • High P/E: growth stocks, high expectations (30-50+) • Low P/E: value stocks, mature industries (5-15) • Compare P/E to industry peers and historical averages
Real-World Example
Tesla trades at $200 with earnings of $4 per share, giving a P/E of 50. Ford trades at $12 with earnings of $2, giving a P/E of 6. Tesla's higher P/E reflects investors expecting massive future growth. Ford's lower P/E reflects mature business with limited growth expectations.
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