P/E ratio

The Price-to-Earnings ratio is the most widely used valuation metric in the stock market. It tells you how many dollars investors are willing to pay for each $1 of a company's annual earnings. A P/E of 25x means the market is paying $25 for every $1 the company earns.

What a high P/E means: Investors expect the company to grow earnings significantly in the future. They're paying a premium today for tomorrow's profits. Tech companies and high-growth stocks often trade at 30-100x+ earnings.

What a low P/E means: Either the company is undervalued (a bargain), or the market expects earnings to decline. Banks, utilities, and mature companies often trade at 8-15x earnings.

Limitations: P/E is meaningless for unprofitable companies (you can't divide by zero or negative earnings). It also doesn't account for debt - a company can inflate EPS through leverage. That's why professionals also use EV/EBITDA, which adjusts for capital structure.

The S&P 500's long-term average P/E is about 16-17x. When the index trades above 25x, stocks are historically expensive. Below 12x, they're cheap.