Earnings Per Share and the P/E Ratio

Earnings per share (EPS) and the price-to-earnings (P/E) ratio are two of the most commonly cited figures when discussing whether a stock looks cheap or expensive relative to its profits.

EPS divides a company's net income by its number of outstanding shares, giving a per-share measure of profitability. The P/E ratio then divides the current share price by EPS, producing a multiple that represents how much investors are paying for each dollar of earnings.

• Trailing P/E uses earnings from the past twelve months, while forward P/E uses analysts' earnings estimates for the year ahead.
• A higher P/E can reflect expectations of faster future growth, while a lower P/E can reflect slower growth expectations or perceived risk.
• P/E ratios are most meaningful when compared within the same sector, since typical multiples vary widely across industries.