What does the P/E ratio represent?

The P/E ratio, or price-to-earnings ratio, is a key financial metric used to assess the relative value of a company's shares. Specifically, it represents the market price per share of a company's stock divided by its earnings per share (EPS).

Using this formula, when investors analyze a company, they’re essentially measuring how much they are willing to pay for each dollar of earnings the company generates. A higher P/E ratio may suggest that the market expects future growth and higher earnings, while a lower P/E ratio could indicate that the market has lower expectations for future growth.

In this case, option B correctly captures the definition of the P/E ratio as it directly relates the share price to EPS, which is fundamental to understanding how the market values a company’s earnings in relation to its stock price.