What does a P/E ratio represent?

The P/E ratio, or price-to-earnings ratio, specifically represents the market value per share of a company in relation to its earnings per share. This ratio is a crucial metric used by investors to evaluate the relative value of a company's shares. A high P/E ratio may indicate that the market expects future growth and is willing to pay more for each dollar of earnings, while a low P/E ratio might suggest that the stock is undervalued or that the company is experiencing difficulties.

The correct understanding of the P/E ratio allows investors to make informed decisions about buying or selling stocks based on the underlying value relative to earnings performance, providing insight into investor expectations and potential investment opportunities.