What is a stock's P/E?

A company's P/E can also be benchmarked against other stocks in the same industry or against the broader market, such as the S&P 500 Index. Analysts interested in long-term valuation trends can look at the P/E 10 or P/E 30 measures, which average the past 10 or 30 years of earnings.

What is the P/E ratio of a stock?

If a company’s stock is trading at $100 per share, for example, and the company generates $4 per share in annual earnings, the P/E ratio of the company’s stock would be 25 (100 / 4). To put it another way, given the company’s current earnings, it would take 25 years of accumulated earnings to equal the cost of the investment.

Does a P/E ratio indicate a stock is overvalued?

Similarly, if a P/E ratio suggests a stock is overvalued, it does not follow that the stock price is bound to fall. Many factors contribute to the market price of a stock, and a P/E ratio is not determinative or indicative of price movements. Perspective is necessary.