What does the Price-Earnings Ratio indicate about a stock?

The Price-Earnings Ratio (P/E Ratio) is a valuable metric that highlights how much investors are willing to pay for each dollar of earnings generated by a company. It is calculated by dividing the current market price of the stock by its earnings per share (EPS). A high P/E ratio may suggest that the market anticipates future growth and is willing to pay a premium for the stock, potentially indicating that the stock is overvalued. Conversely, a low P/E ratio might suggest that the stock is undervalued, or that the company may be experiencing difficulties or a lack of growth prospects. Thus, the P/E ratio provides investors with insights into market expectations and valuation, which assists them in making informed decisions about whether a stock is over- or under-priced relative to its earnings performance.