Price-to-Earnings Ratio (P/E).

The price-to-earnings ratio (P/E) is the most widely cited valuation multiple in equity investing, dividing a stock's current share price by its earnings per share over a specified period. The trailing P/E uses the most recent twelve months of actual earnings; the forward P/E uses analysts' consensus estimate of next year's earnings. The ratio answers a simple question: how many dollars are investors paying today for each dollar of annual profit the company earns? A P/E of 20 means investors are paying $20 for every $1 of earnings, implying they expect either strong future growth, reliable long-term profitability, or both. Context is everything in interpreting P/E ratios. A P/E that appears elevated versus historical averages may be justified by low interest rates, since the discount rate applied to future earnings falls when rates decline, mathematically supporting higher multiples. A cyclically low P/E may be a value trap if the "E" in the denominator is temporarily high and about to contract. Benjamin Graham cautioned investors against relying on a single year's earnings precisely because of this cyclicality, a concern that motivated Robert Shiller's development of the CAPE ratio using ten-year average earnings. The P/E ratio is most useful when compared to the same company's historical range, to sector peers, and to the prevailing interest rate environment. It loses meaning when applied to companies with negative earnings and should be supplemented by other metrics — price-to-sales, price-to-cash-flow, or enterprise value multiples — when the denominator is unreliable.