What does the price-to-earnings (P/E) ratio measure?

The price-to-earnings (P/E) ratio is a key metric used in finance to help investors assess a company's valuation. It is calculated by taking the current share price and dividing it by the earnings per share (EPS). This ratio provides insight into how much investors are willing to pay per dollar of earnings, allowing them to gauge whether a stock is overvalued or undervalued compared to its earnings performance.

Investors often use the P/E ratio to compare different companies within the same industry or to evaluate the historical P/E ratio of a single company to determine its relative value over time. A higher P/E ratio may suggest that investors expect future growth in earnings, while a lower P/E ratio may indicate that the company is undervalued or facing difficulties.

Understanding this valuation measure is crucial, as it serves as a foundational tool in making informed investment decisions. The other options do not accurately capture the essence of the P/E ratio, as they address different financial metrics or concepts entirely.