Definition: Value investors have long considered the price earnings ratio [p/e ratio] one of the single most important numbers available when evaluating a company's stock price. Made popular by the late Benjamin Graham, who was dubbed the "Father of Value Investing" [as well as Warren Buffett's mentor], Graham preached the virtues of this mathematical ratio as one of the fastest and most accurate ways to determine the relative expensiveness of a stock.
The p/e ratio is how much money you are paying for $1 of the company's earnings. In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the p/e ratio is 10 [because you are paying ten-times earnings [$20 per share divided by $2 per share earnings = 10 p/e]]
For more information, read P/E Ratio: The Key to Understanding Value and The Bottom Line: How to Study Corporate Earnings.
Examples:
If a company earns $5 per share and the stock trades at $45 per share, the p/e ratio is 9 ($45 per share divided by $5 earnings per share = 9 p/e).
