The price-to-earnings ratio is one of the most widely used metrics for evaluating whether a stock is overvalued or undervalued. It tells you how much investors are willing to pay for each dollar of a company's earnings. The formula is simple: P/E = Stock Price / Earnings Per Share, or equivalently, P/E = Market Cap / Net Income.

A high P/E ratio can mean investors expect strong future earnings growth, or it can indicate that a stock is overpriced. A low P/E might suggest the stock is undervalued, or it could reflect genuine concerns about the company's prospects. The earnings yield, which is the inverse of the P/E ratio expressed as a percentage, provides an easy way to compare stock returns to bond yields.

For example, a stock trading at $150 with an EPS of $6.50 has a P/E ratio of 23.08x and an earnings yield of 4.33%. This means investors pay $23.08 for every $1 of earnings. To evaluate whether this is reasonable, compare it to the industry average, the company's historical P/E, and the broader market. The S&P 500 has historically averaged a P/E around 15-17x, though growth sectors often command much higher multiples.