A stock's market price divided by its earnings per share - the primary valuation multiple used to compare whether a stock is cheap or expensive relative to its profits.
The price-to-earnings ratio is the most widely used equity valuation metric: P/E = market price per share ÷ earnings per share (EPS). A P/E of 20 means investors are paying USD 20 for every USD 1 of annual earnings. Whether that represents value depends on the company's growth rate, the sector, the interest rate environment, and the market's overall P/E.
The trailing P/E uses reported historical earnings; the forward P/E uses consensus analyst earnings estimates for the next 12 months. The Shiller CAPE (Cyclically Adjusted P/E) uses 10-year inflation-adjusted average earnings to smooth cyclical fluctuations - it is widely used to assess market-level overvaluation. A CAPE above 30 has historically been associated with below-average subsequent 10-year returns for the S&P 500.
Sectors have structurally different P/E norms. Fast-growing technology companies routinely trade at 30–50× earnings; defensive utilities and banks often trade at 10–15×. Comparing P/E across sectors without adjusting for growth rates is misleading. The PEG ratio (P/E divided by the expected earnings growth rate) provides a growth-adjusted view: a PEG below 1.0 suggests a stock may be undervalued relative to its growth trajectory.
For stock CFD traders, sharp moves in P/E - driven by price changes or earnings surprises - often accompany the highest-volatility sessions. A stock that misses earnings estimates and sees its P/E compress from 25× to 18× during a single post-earnings session can produce 20–30% price moves.
Worked Example
Stock price: USD 120. Annual EPS: USD 6. Trailing P/E = 120 ÷ 6 = 20×. Analyst consensus forward EPS: USD 8. Forward P/E = 120 ÷ 8 = 15×. Expected EPS growth: 33%. PEG = 15 ÷ 33 = 0.45 - suggesting the stock may be attractively priced relative to its growth rate.