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Definition: The price of the stock divided by the earnings per share. It's used to determine whether or not a stock is overvalued.
TeenAnalyst Advice: People often get caught up in a stock's P/E ratio. It's not really all that great of a way of measuring a stock's true value. But it is a good way to get a quick idea of if it's overvalued compared to its competitors.
A stock with a low p/e ratio doesn't necessarily have to be a "good" one. Some industries have traditionally low p/e ratios, such as homebuilders. A technology company may be able to justify a p/e ratio of 40, but a homebuilder may only be able to justify a p/e of 12.
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