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

The price-to-earnings ratio (P/E ratio) is indeed a valuation ratio that provides insight into how much investors are willing to pay for each dollar of earnings generated by a company. It is calculated by dividing the company's current share price by its earnings per share (EPS). This ratio is widely used by investors to assess whether a stock is overvalued, undervalued, or fairly priced relative to its earnings, thus serving as a useful tool for comparison among companies within the same industry or sector.

This understanding of the P/E ratio is essential for making informed investment decisions, as it encapsulates market expectations about a firm's future growth prospects; a high P/E may suggest that the market expects significant growth in the future, while a low P/E might indicate that the company is undervalued or experiencing challenges.

The other options do not accurately describe the P/E ratio: measuring a company's total revenue, evaluating the relationship between assets and liabilities, or assessing stock volatility does not encompass the valuation aspect of the P/E ratio which focuses on share price relative to earnings.