The price-earnings (PE) ratio is a value metric which defines the relationship between a stocks price and the underlying earnings of the stock. It is the amount that must pay for every 1 unit of earnings of the company. A higher PE indicates a larger expected future earnings growth.
A high PE could mean that a company is overvalued, a low PE could mean that a company is undervalued
- We can compare a company’s PE to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s PE to its historical PE to gauge if it is cheaper vs. history.