Describe the relationship between the value of the stock and the price to earnings ratio. 

The price to earnings (P/E) ratio is the most popular metric used to gauge a stock’s value. It is calculated by dividing a company’s share price by its current annual earnings per share. The higher the P/E ratio, the more expensive a stock is considered compared to its peers in the industry; conversely, lower ratios represent stocks that are less expensive.

In general, when it comes to valuing stocks, investors rely on two primary factors: expected future performance and current valuation. Because of this, it stands to reason that there should be a link between these two elements; if you assume one component will increase or decrease over time, then so too must the other. This is why the P/E ratio can be an important indicator for predicting future performance and how much investors are willing to pay for stock today versus what they think it could realistically be worth in the future—essentially indicating whether or not a particular investment opportunity appears attractive right now.

Investors typically use higher and lower P/E ratios as reference points when evaluating potential new investments—if another company’s shares have a much lower price point than yours but their financial outlook appears just as strong (or better), then you may want to reconsider investing in your own option if it seems relatively expensive in comparison with similar options on the market. Conversely, if your chosen option looks especially cheap compared to its competitors then you may have identified an underappreciated bargain worthy of further investigation.

It’s important for all investors—especially risk-minded ones—to remember that high P/Es don’t always mean good investments and low ones don’t necessarily signify bad investments either; shrewdly analyzing underlying fundamentals such as revenue growth potential alongside traditional metrics should give traders greater clarity into any individual security’s long-term prospects regardless of current conditions or short-term expectations from Wall Street analysts.