The price-to-earnings ratio compares a company's stock price to its annual profit per share. It tells you how many dollars investors are willing to pay for each dollar of profit the company makes. A lower P/E ratio might suggest a stock is cheap, while a higher one might suggest investors expect faster future growth.
If a company's stock costs $50 per share and it earned $5 per share last year, its P/E ratio is 10. This means investors are paying $10 for every $1 of annual earnings. If another company has a stock price of $100 with $5 in earnings per share, its P/E ratio is 20, suggesting investors have higher growth expectations for that company.
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