Valuation

How expensive a stock is compared with what the company earns or might earn. A common measure is the price-to-earnings (P/E) ratio: the share price divided by yearly earnings per share.

A high P/E means investors are paying a lot for each dollar of profit, usually because they expect fast growth. If that growth disappoints, highly valued stocks can fall hard.

Also called: price-to-earnings ratio, price/earnings ratio, P/E ratio, P/E.

Related terms

  • Market cap: What the stock market says a whole company is worth: the share price times the number of shares. If the price falls 10%, the market cap falls 10% too.
  • Earnings per share: A company's profit divided by its number of shares. It's the most common way to measure profit, and the number Wall Street compares with its forecasts each quarter.
  • Price target: The price an analyst thinks a stock will reach, usually within 12 months. It's an opinion, not a promise, and analysts often disagree.

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