Price-To-Earnings (P/E) Ratio

The P/E ratio is the value of a company’s stock divided by its annual profit, and it’s used to value companies and compare them against one another. Companies that are “richly” valued are worth a lot relative to their profits – that’s usually because their profits are expected to increase quickly in the future and, therefore, investors are paying up now for access to those future profits. Companies that are “cheaply” valued are usually mature or struggling companies, i.e. they are unlikely to exhibit much profit growth (although this doesn’t necessary mean they are bad investments).