What does the price-to-earnings (P/E) ratio measure?

The price-to-earnings (P/E) ratio serves as a crucial indicator in financial analysis, specifically assessing how much investors are willing to pay for each dollar of a company's earnings. This ratio is calculated by dividing the market price per share of the company’s stock by its earnings per share (EPS).

By comparing the stock price to its earnings, the P/E ratio provides insight into how expensive or undervalued a stock may be relative to its earnings potential. A high P/E ratio might suggest that the market expects future growth and earnings potential from the company, while a low P/E ratio might indicate that the stock is undervalued or that the company has performance concerns.

Understanding this ratio allows analysts and investors to evaluate whether a stock is fairly priced, overvalued, or undervalued relative to its earnings, which is a key factor in making investment decisions. Other options may focus on different metrics or aspects of financial performance, but they do not accurately represent the specific measure that the P/E ratio addresses.