The price to earnings (P/E) ratio compares the share price of a company to the earnings it generates per share. The formula used to calculate this ratio simply divides the market value per share by the earnings per share (EPS). The typical calculation of the P/E ratio uses a company's EPS from the last four quarters.
A variation on this calculation is known as the forward P/E. Investors or analysts may use projected earnings per share, meaning the earnings expected to be generated per share over the next 12 months. This variation is also known as the leading or projected P/E. The significant difference is the forward P/E is based on analyst speculation about a company's future earnings rather than historical data.
The theory behind a stock's P/E ratio is it provides an estimate of the amount an investor is willing to pay per dollar generated in earnings. The P/E ratio also accounts for company growth expectations in the market. Because stock price is a reflection of what investors think a company is worth, the value accounts for growth. (For related reading, see "Forces That Move Stock Prices.")
The forward P/E ratio should be considered more in terms of the optimism of the market for a company's prospective growth. A company with a higher forward P/E ratio than the industry or market average indicates an expectation the company is likely to experience a significant amount of growth. If a company's stock fails to meet the high ratio value with increased per share earnings, the price of the stock will fall.
Ultimately, the P/E ratio is a metric that allows investors to determine how valuable a stock is, more so than market price alone. The P/E ratio and forward P/E ratio are particularly helpful when comparing similar companies within the same industry. (For related reading, see "How Can I Calculate a Company's Forward P/E in Excel?")

Can stocks have a negative pricetoearnings ratio?
A stock can have a negative pricetoearnings ratio (P/E). A negative P/E ratio means the company has negative earnings or ... Read Answer >> 
Where can I find the P/E ratios for the Dow and S&P 500?
The most accurate P/E ratio for an index such as the S&P 500 will be found if an investor calculates the P/E ratios of all ... Read Answer >> 
What is the average pricetoearnings ratio in the drugs sector?
Learn what the average pricetoearnings ratio is for companies operating in the drugs sector and why this metric is important ... Read Answer >> 
What is the average pricetoearnings ratio in the food and beverage sector?
Learn what the average pricetoearnings ratio is in the food and beverage sector and why other measures such as median should ... Read Answer >>

Investing
Explaining Forward PricetoEarnings Ratio
The estimated P/E of a company is often used to compare current earnings to estimated future earnings. 
Investing
Comparing the P/E, EPS And Earnings Yield
Here are three ratios that help investors value stock returns. 
Investing
How Do I Calculate the PriceEarnings Ratio?
If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as... 
Investing
Getting On The Right Side Of The P/E Ratio Trend
Buying at the right time is crucial, but how do we know when that is? 
Investing
Are stocks with low P/E ratios always better?
Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends. 
Investing
Is Stock With a Lower P/E Always A Better Choice?
Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things. 
Investing
The 4 basic elements of stock value
Investors use these four measures to determine a stock's worth. Find out how to use them. 
Investing
8 Blue Chip Stocks with Low P/E Ratios
Discover why the price/earnings (P/E) ratio is important in determining the relative value of a stock and find out which S&P 500 stocks have the lowest P/E ratios.

Trailing PriceToEarnings  Trailing P/E
Trailing pricetoearnings (P/E) is is calculated by taking the ... 
Price/Earnings To Growth  PEG Ratio
Price/Earnings to Growth (PEG) is a stock's price to earnings ... 
Relative Valuation Model
A relative valuation model is a business valuation method that ... 
Earnings Yield
The earnings yield refers to the earnings per share for the most ... 
Accounting Ratio
Accounting ratios, also known as financial ratios, are used to ... 
Franchise P/E
Franchise P/E, the present value of new business opportunities ...