Price/Earnings ratio (P/E)

The P/E ratio compares share price to earnings per share (EPS). It answers: how many years of earnings is the market paying for this company? Example: Price $100, EPS $5 → P/E = 20. At constant earnings, you'd need 20 years to 'earn back' the purchase price. Context: A low P/E can look cheap but may signal expected earnings decline. A high P/E isn't automatically expensive — it's common for firms with strong expected growth. Watch out: Only compare P/E within the same industry. A P/E of 30 is normal for a software growth stock but very high for a bank.