P/E Ratio (Price-to-Earnings)

The Price-to-Earnings ratio is one of the most widely used stock valuation metrics. It tells you how much investors are willing to pay for each dollar of a company's earnings. A P/E of 20 means investors pay $20 for every $1 of annual earnings.

A high P/E ratio can indicate that a stock is overvalued or that investors expect high future growth. A low P/E may suggest a stock is undervalued or that the company faces challenges. The average P/E of the S&P 500 historically hovers around 15-17.

Investors compare a company's P/E to its industry peers, its historical average, and the broader market to assess relative valuation. The forward P/E uses projected future earnings while the trailing P/E uses past earnings. Neither tells the complete story alone, but P/E is an essential starting point for valuation analysis.