The ratio is the ratio of price per share to earning per share is commonly known as the price-earning ratio. Much of the real world discussion of stock market valuation concentrates on the firm’s price-earning multiple. Earning a multiplier approach states that the price of the stock is equal to the product of its earnings and a multiplier. It implies that the price of a stock is the product of EPS and P/E multiplier of that stock.

The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. In short, the P/E ratio shows what the market is willing to pay today for a stock based on its past or future earnings.