What is the Price-to-Earnings (P/E) ratio and how is it calculated?

The Price-to-Earnings (P/E) ratio is a number that shows how much investors are willing to pay for each dollar of a company's profit. It is calculated by dividing a company's stock price by its earnings per share.

How to Calculate P/E Ratio

To calculate the P/E ratio, you need two numbers: the current stock price and the earnings per share (EPS). The earnings per share is found by dividing the company's total profit by the number of shares outstanding. For example, if a stock costs $50 and the company earned $5 per share, the P/E ratio would be 50 divided by 5, which equals 10.