P/E ratio

The price/earnings ratio is the most common measure of whether a stock is overpriced or underpriced. It is calculated by dividing a stock’s market capitalisation by its after-tax earnings over a 12 month period. The P/E ratio reflects how many times earnings investors will pay for one share in the company. The higher the P/E, the higher the market’s expectations for strong future earnings growth and the more it is willing to pay, which could mean the share is overpriced. Companies that are not turning a profit do not have a P/E ratio.

This definition is for general information purposes only