Market price per share divided by annual earnings per share — the most widely used shorthand for whether a stock is cheap or expensive relative to its earnings.
Deeper Explanation
P/E is a ratio, not a verdict. A P/E of 8x is cheap only if earnings are sustainable and growing; it is expensive if earnings are cyclically inflated. Graham's preferred approach was to use 10-year average earnings (normalised for the cycle) rather than last twelve months. A high P/E means the market expects strong growth or ascribes quality to the business; a low P/E means the opposite or reflects genuine neglect. The earnings yield (inverse of P/E) is directly comparable to bond yields and helps frame whether equities are attractive versus fixed income.
Continue Learning
Go deeper into the Value school — frameworks, case studies, and decision systems.