Share price divided by earnings per share: how many dollars investors pay for each dollar of annual profit. A rough gauge of how expensive a share or market is.
A P/E of 20 means the price is 20 times the last year's (trailing) or next year's (forward) earnings per share. Market-wide P/Es are calculated the same way for an index.
A high P/E can mean investors expect fast growth, or that the share is expensive; a low P/E can mean cheap, or that earnings are expected to fall.
Why it matters
Valuation matters most over long periods: starting from a high market P/E has historically meant lower returns over the following decade. Rising interest rates tend to push P/Es down, because future profits are worth less today when safe bonds pay more.
