Price-to-Earnings Ratio (P/E)
Definition
The ratio of a company's share price to its earnings per share, showing how much investors pay for each unit of profit. It is a common valuation yardstick, though it varies widely by sector and growth expectations.
Formula
P/E = Share price ÷ Earnings per share
Related Terms in Financial Analysis
Earnings Per Share (EPS)
A company's net profit divided by the number of shares outstanding, showing profit attributable to each share. It is a core input to valuation measures such as the P/E ratio.
Working Capital Management
The management of short-term assets and liabilities — inventory, receivables, payables and cash — to keep a business liquid and operating smoothly without tying up more funds than necessary.
Contribution Margin Ratio
Contribution margin as a percentage of sales, showing how much of each sales unit is left after variable costs to cover fixed costs and profit. It drives break-even and pricing analysis.
Margin of Safety
The gap between actual or budgeted sales and the break-even point, showing how far sales can fall before the business makes a loss. A larger margin of safety means lower risk.
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