Price-to-earnings (PE) ratio

What is a P/E ratio? 

The price-to-earnings (P/E) ratio is a valuation metric used to compare a company's current share price to its per-share earnings. It's calculated by dividing the market value per share by the earnings per share (EPS). A high P/E ratio could mean a company's stock is overvalued or that investors are expecting high growth rates in the future.

Why is the P/E ratio important to consider when trading?

The P/E ratio is a crucial tool for traders in assessing whether a stock is fairly valued, overvalued, or undervalued compared to its earnings. It provides insight into market expectations of a company's future growth and profitability. Traders use the P/E ratio to compare companies within the same industry and to gauge market sentiment. However, it should be used in conjunction with other financial metrics for a comprehensive analysis.