What does the price-to-earnings (P/E) ratio indicate?

The price-to-earnings (P/E) ratio is a key financial metric that illustrates the relationship between a company’s current share price and its earnings per share (EPS). This ratio is calculated by dividing the market price per share by the earnings per share, thus providing investors with insights into how much they are paying for each dollar of earnings the company generates.

A high P/E ratio may suggest that investors expect future growth in earnings, making the stock potentially overvalued, while a low P/E ratio might indicate that the stock is undervalued relative to its earnings potential. Investors often use the P/E ratio to compare companies within the same industry to evaluate which may offer better value based on their earnings.

The other options do not accurately describe what the P/E ratio measures. For instance, total revenue, number of shares, and dividend yield do not relate directly to the relationship between share price and earnings, which is the core essence of the P/E ratio.