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

The price-to-earnings (P/E) ratio is a key financial metric that measures the relationship between a company's current share price and its earnings per share (EPS). This ratio is calculated by dividing the current market price of the stock by its earnings per share. It provides investors with insight into how much they are willing to pay for each dollar of earnings, which can indicate whether a stock is overvalued or undervalued relative to its earnings performance.

A high P/E ratio may suggest that investors expect high growth rates in the future, which can attract more investment. Conversely, a low P/E ratio might indicate that the company is undervalued, or it may reflect poor growth prospects. Therefore, the P/E ratio serves as a crucial tool for evaluating stock valuations and making informed decisions by comparing it to the P/E ratios of similar companies or the broader market averages.

The other options address different aspects of financial analysis but do not specifically define what the P/E ratio indicates. For example, while a company's growth potential could influence its P/E ratio, the ratio itself does not directly measure growth potential. Similarly, the health of the overall market can affect P/E ratios, but does not define them. Lastly, a company's dividend policy relates