The Price-to-Earnings (P/E) ratio is a financial metric used to evaluate the valuation of a company's stock. It tells you how much investors are willing to pay today for one dollar of a company’s earnings.

Here’s the basic formula:

\text{P/E Ratio} = \frac{\text{Market Price per Share}}{\text{Earnings per Share (EPS)}}

Market Price per Share is the current stock price.

Earnings per Share (EPS) is the company's profit divided by the number of outstanding shares.

For example:

If a company's stock is trading at $100 and its EPS is $5, the P/E ratio would be:

\text{P/E} = \frac{100}{5} = 20

This means investors are willing to pay $20 for every $1 of the company's earnings.

Key Points:

A high P/E might suggest the stock is overvalued or investors expect high growth in the future.

A low P/E might suggest the stock is undervalued or the company is facing difficulties.

It’s often compared with other companies in the same industry or with the overall market to gauge if a stock is fairly priced.

Would you like me to also explain the difference between forward and trailing P/E ratios?