The price-to-earnings ratio (P/E ratio) is used to evaluate the relative value of a company's stock. It is calculated by dividing the current market price per share of a stock by the earnings per share (EPS) of the company over a specific period, usually the most recent fiscal year.
Investors typically use the P/E ratio to assess whether a stock is overvalued or undervalued. It provides insights into how much investors are willing to pay for each dollar of earnings generated by the company. A higher P/E ratio generally indicates that investors have higher expectations for future earnings growth, while a lower P/E ratio may suggest lower growth expectations or undervaluation.
Comparing the P/E ratio of a company to its industry peers or the overall market can provide insights into its valuation relative to similar companies or the broader market. However, the P/E ratio should not be used as the sole indicator of a stock's attractiveness. Other factors such as the company's financial health, industry dynamics, growth prospects, and competitive position should also be considered.