What Is the P/E Ratio (Price to Earnings): How to Value a Stock and What to Watch
What the P/E ratio means, how it is calculated, how to read it, when it is high and when low and why it cannot be used alone. Examples and other stock valuation measures.
In short: P/E (price to earnings) says how many times larger a stock's price is than the company's annual earnings per share. You calculate it as the share price divided by earnings per share. A higher P/E means investors pay more for earnings, often because of expected growth. But P/E on its own does not decide a company's quality, so you have to compare it within the industry and with other measures.
How P/E is calculated
P/E = share price / earnings per share (EPS). If a stock costs 100 dollars and the company earns 5 dollars per share a year, the P/E is 20. It means that you pay 20 dollars for each dollar of annual earnings.
How to read P/E
- A higher P/E often signals expected fast earnings growth, but also a higher risk that the expectations will not be met.
- A lower P/E can mean a cheaper stock, but sometimes a company with problems or slow growth.
- There is no universal good number. The average differs by industry and by period.
Types of P/E
- Trailing P/E is calculated from earnings over the past 12 months.
- Forward P/E uses estimated earnings for next year and depends on the quality of the estimates.
Both values are shown on our stock pages, for example Apple or Microsoft, together with a plain-language valuation check.
What to watch out for
- Compare like with like. Technology companies usually have a higher P/E than banks or energy.
- One-off items. An extraordinary profit or loss can distort P/E.
- Negative earnings. For loss-making companies P/E is not calculated.
- Cyclical companies. At the peak of earnings P/E looks low and in a downturn high.
- Debt. P/E does not take a company's debt into account.
Other measures that complement P/E
- P/S (price to sales) for companies without earnings.
- P/B (price to book value) mainly for banks.
- Dividend yield and payout ratio.
- Revenue and earnings growth, debt and margins.
Frequently asked questions
Is a low P/E good?
Not always. A low P/E can mean an undervalued company, but also one that is struggling or has limited growth.
What P/E is "normal"?
It depends on the industry and the period. The market's long-term average is only a rough guide, not a rule.
Does it make sense to use P/E for ETFs?
For funds, P/E is calculated as a weighted average of the companies in the fund and shows how the market is valued. It serves as additional information.
Is P/E enough to decide on a purchase?
No. Use it as one of the measures and add an analysis of the company, its debt, competition and your own goal.
For information only, not investment advice. Investing is risky.
