The price-to-earnings (P-E) ratio or multiple is a metric used to value a stock. It is calculated as the market price per share divided by the earnings per share (EPS). The calculation of the PE ratio typically takes EPS of the trailing 12 months.
The P-E multiple is used to determine the attractiveness of a stock’s price relative to the market as measured by the PE ratio of the index and relative to peer companies by comparing it with the average PE ratio of the industry.
A stock that is trading at a low PE multiple need not necessarily be an attractive investment opportunity. The lower multiple may be on account of the market assigning the company a lower valuation on account of its poor growth prospects. Similarly, a high PE multiple must be justified with high growth prospects.