Everything You Need to Know About P/E Ratios

There are many different ways to calculate this popular stock market measure—how you define "earnings" is key.

When it comes to stock market measures, none is more popular than the price-earnings ratio, a yardstick used to determine whether individual stocks (or the market as a whole) are cheap, reasonably priced, expensive or ridiculously overvalued. A P/E ratio essentially tells you how much investors are willing to pay for each dollar of a company’s profits. The P/E ratio is calculated by dividing a company’s stock price by its earnings, or in the case of the broad market, typically the value of Standard & Poor’s 500-stock index divided by its earnings. A low P/E signals a bargain, and a high P/E is a red flag. Simple, right?

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Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.