The Price-to-Earnings or P/E ratio is a financial metric that is widely used by investors to determine the valuation of a company. It is calculated by dividing the current market price of a stock by its Earnings Per Share (EPS).
A P/E ratio of more than 1 means that a company is overvalued, i.e., trading at a price that’s higher than its earnings can justify. On the other hand, if the P/E ratio is less than 1, the company is said to be undervalued, i.e., trading at a price that’s lower compared to its earnings potential.
Investors often prefer undervalued companies since they have a better chance of providing capital appreciation in the long term. The P/E ratio is one of the many ways that investors use to determine if a company is overvalued or undervalued.