What is a price to earning ratio? (P/E) ?

Question

What does this mean ?

Answer 1

Price to earnings ratio basically means how much you are paying for profits from a stock on the dollar.

Sounds confusing? Heres an example:

Lets say a companies PE ratio is 40. This means that investers are willing to pay 40 cents for every dollar earned in proft from the stock.

Generally, the higher the PE, the more in favor the company is to the market and signals that investors are willing to pay more for the stock.

Answer 2

The price of one share of a company's stock, divided by the earnings (profit) of one share worth of the company is the P/E ratio. So, if a stock costs $20 per share and the earnings per share was $2, the P/E ratio would be 10.