Question

What is 'price-to-earnings ratio' (P/E) and how is it used in equity fund analysis?

Accepted Answer

The market price of a stock divided by its earnings per share — used to assess relative valuation; high P/E = expensive, low P/E = potentially undervalued — P/E ratio = Market Price / Earnings Per Share. It shows how many times earnings investors are willing to pay for a stock. High P/E (e.g., growth stocks) means the market expects high future earnings growth; low P/E may indicate undervaluation or earnings risk. Fund managers use portfolio P/E to assess whether the portfolio is expensive or cheap relative to history and peers.