Price-to-Earnings Ratio (P/E)

Definition

A company's share price divided by its earnings per share. It shows the price investors pay per unit of earnings; comparisons depend on whether earnings are historical or forecast.

A trailing P/E uses earnings already reported, while a forward P/E uses estimated future earnings. Investors often compare companies in the same industry using the same version of the ratio. The ratio is hard to interpret when earnings are close to zero or negative.

Example

Company A trades at $40 per share and earned $2 per share over the past year. Its trailing P/E ratio is 20.