Here's a practical, step-by-step way to think about P/E ratios: 1) What it is: P/E = Price per share ÷ Earnings per share (EPS) over the last 12 months. It can also be shown as forward P/E using expected next-year EPS. 2) How to read it: A higher P/E can mean investors expect higher growth or accept more risk; a lower P/E can mean slower growth or undervaluation—but context matters. 3) Run-through example: - Example A (trailing P/E): Stock price = $100; TTM EPS = $5 → P/E = 100 ÷ 5 = 20. - Example B (forward P/E): If next-year expected EPS = $6 → Forward P/E = 100 ÷ 6 ≈ 16.7. - Compare: Industry average P/E = 18. If forward P/E ≈ 16.7 and industry avg is 18, this stock looks slightly cheaper on a forward basis, assuming growth and quality are similar. 4) Practical checks: - Compare with peers in the same industry, not across unrelated sectors. - Look at growth rate (PEG ratio) to see if a high P/E is justified by higher expected growth. - Check for earnings quality (one-time items can inflate EPS), and consider other metrics like debt, cash flow, and ROE. 5) Limitations: P/E doesn’t tell you about debt, cash flow, or future risk. It can be distorted by accounting choices or cyclical earnings. Use it as a starting point, not a final verdict.

A valuation metric that compares a company’s current share price to its per-share earnings (EPS). It indicates how much investors are willing to pay for each dollar of earnings. A higher P/E suggests higher growth expectations or greater risk; a lower P/E suggests lower growth expectations or potential undervaluation. It should be used alongside other factors and is most meaningful when comparing similar companies.