P/E

 is a valuation ratio of a company's current share price compared to its per-share earnings. The ratio is calculated as:


 * Market Value Per Share / Earnings Per Share (EPS)

investopedia explains: For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. Also sometimes known as "price multiple" or "earnings multiple".

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Shiller PE10
Robert Shiller has developed a stock valuation metric known as the "PE10"; alternatively called the CAPE (Cyclically Adjusted Price Earnings) ratio. It's P/E, but with the EPS (Earnings Per Share) averaged over the prior 10 years and is adjusted for inflation.



\text{PE10} = \frac{\text{Stock Price}}{\text{average EPS over last 10 years}} * \frac{\text{current CPI-U}}{\text{CPI-U}} $$

where (current CPI-U) / (CPI-U) is the CPI-U adjustment for inflation.