Price to Earnings (P/E) Ratio

Also called the “multiple.” The P/E ratio is calculated as a stock’s price divided by its earnings per share. It gives investors an idea of how much they are paying for a company’s current earnings. For example, a stock selling for $30 a share with earnings per share of $2 has a P/E ratio of 15. In other words, the investor paid $15 for each $1 of earnings. Faster growing, or higher risk companies, generally have higher P/E ratios than slower growing, or less risky, firms.