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

The price-to-earnings ratio (P/E ratio) is a financial metric that compares a company's current share price to its earnings per share (EPS). This ratio is used by investors to assess the relative value of a company's stock. A higher P/E ratio may indicate that investors expect higher future growth, while a lower P/E may suggest the opposite.

Using the P/E ratio helps investors determine whether a stock is overvalued or undervalued compared to its earnings, giving insights into how much investors are willing to pay for each dollar of earnings. Understanding the relationship between share price and earnings is crucial for making informed investment decisions, as it reflects the market's expectations and sentiment regarding a company's profitability and growth potential.

The other options discuss different financial relationships that don't align with the definition of the P/E ratio, which is focused specifically on comparing a company's share price and its earnings on a per-share basis.