The Price-to-Earnings (P/E) ratio answers a simple question: how many years of the company's CURRENT profit are you paying for, in the stock price? The formula is Price per Share ÷ Earnings per Share. A stock trading at $60 with $3 of annual earnings per share has a P/E of 20 — you're paying $20 for every $1 of current annual profit.
A lower P/E can suggest a stock is cheap relative to its earnings, while a higher P/E often means investors expect faster future growth — they're willing to pay more today for profits they expect to be much bigger later. This is exactly why fast-growing technology companies often trade at much higher P/E ratios than slow-growing utility companies — the market is pricing in very different growth expectations, not necessarily saying one is a "better" investment.
P/E has real limits. It only works when a company actually has positive earnings (a company still losing money has no meaningful P/E). It also says nothing on its own about HOW FAST earnings are growing — a P/E of 30 for a company growing earnings 40% a year tells a very different story than a P/E of 30 for a company barely growing at all, which is why some investors also look at the PEG ratio (P/E divided by growth rate) for a fuller picture.
Real, current P/E ratios for Apple, Tesla, and Ford — not a snapshot from when this lesson was written. Rank them from cheapest to most expensive on this one metric before checking your instinct against what's actually happening.
Correct moves you up, wrong moves you down — reach 100 to master this lesson.