The Price-to-Earnings ratio is one of the most widely used metrics for valuing stocks. It tells you how much investors are willing to pay for each dollar of earnings. A P/E of 20 means investors pay $20 for every $1 of annual profit.
How to Calculate P/E Ratio
P/E = Stock Price / Earnings Per Share (EPS)
For example, if Toyota (7203.T) trades at 3,500 yen and has EPS of 250 yen, its P/E is 14.
What is a Good P/E Ratio?
This depends on the market and sector:
| Market | Average P/E |
| Japan (Nikkei 225) | 15-20 |
| China (SSE Composite) | 12-18 |
| India (SENSEX) | 20-25 |
| South Korea (KOSPI) | 10-15 |
Tech stocks typically have higher P/E ratios (30-50+) because investors expect faster growth. Banks and utilities have lower P/E (8-15).
Limitations
P/E doesn't work well for companies with negative earnings. It also doesn't account for growth rate — a company growing 30% per year deserves a higher P/E than one growing 5%.