The P/E ratio is the most widely used valuation metric in the stock market. Formula: P/E = Share Price ÷ Earnings Per Share. If a stock trades at $100 and earns $5 per share, its P/E is 20x — meaning investors pay $20 for every $1 of annual profit. Lower P/E suggests cheaper valuation; higher P/E suggests investors expect faster growth.
Benchmarks: the S&P 500 average P/E is historically around 15-17x. Tech stocks often trade at 25-40x because of high growth expectations. Nvidia traded at 60x+ during the AI boom. Value stocks like banks trade at 8-12x. India's Nifty 50 typically trades at 18-22x P/E — above the global average due to higher growth.
Two flavors: trailing P/E (based on actual past 12 months' earnings) and forward P/E (based on estimated future earnings). A high P/E does not always mean overvalued — Amazon traded at 300x+ P/E for years while reinvesting profits into growth. Context matters: always compare P/E within the same industry.