What does the price-to-earnings (P/E) ratio measure?

The price-to-earnings (P/E) ratio is a financial metric that evaluates a company's current share price in relation to its per-share earnings. This ratio is significant because it offers insight into how much investors are willing to pay for a dollar of the company's earnings. A higher P/E ratio may suggest that the market expects future growth, while a lower ratio could indicate that the stock is undervalued or that the company is facing challenges.

Investors use the P/E ratio to assess whether a stock is overvalued or undervalued compared to its earnings, making it a vital tool in valuation analysis. By comparing the P/E ratio of a company to its peers within the same industry or to the market as a whole, investors can gain insights into relative valuation and make more informed investment decisions. This characteristic of the P/E ratio makes it an essential measure in the context of equity analysis and investment strategies.