P/E Ratio

The price-to-earnings ratio is a stock's share price divided by its earnings per share — the number of dollars the market pays for each dollar of annual profit. A $60 stock earning $3.00 per share trades at a P/E of 20.

Trailing P/E uses the last twelve months of reported earnings; forward P/E uses next year's estimates, so a fast grower can look expensive on trailing and reasonable on forward. Neither works for unprofitable companies — negative earnings make the ratio meaningless, which is why pre-profit names get valued on price-to-sales instead.

P/E only means something against a benchmark: the company's own history, its sector, or the market. The S&P 500 has averaged a trailing P/E in the mid-to-high teens over the long run, so a 40x multiple is a bet that earnings will grow fast enough to justify the premium.