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

The price-to-earnings (P/E) ratio is a financial metric that provides insight into how much investors are willing to pay for a dollar of earnings. It is calculated by dividing a company's current share price by its earnings per share (EPS). This ratio indicates the market value placed on each dollar of a company's earnings, allowing investors to assess the relative value of a stock.

A high P/E ratio might suggest that investors are expecting higher growth rates in the future compared to companies with lower P/E ratios. Conversely, a low P/E ratio could indicate that a stock is undervalued or that the company is experiencing difficulties. Understanding the P/E ratio helps investors compare the valuation of companies within the same industry or across different sectors, making it an essential tool for investment decision-making.

The other options do not accurately represent the P/E ratio: it does not provide total earnings, it is not specifically about growth potential as that requires more context, and it does not relate to asset liquidity. These are different financial metrics entirely, each serving its own purpose in financial analysis and valuation.