Price-to-Earnings RatioP/E
The price-to-earnings ratio divides a share's price by its earnings per share, showing how much investors pay for each unit of profit.
The price-to-earnings ratio is the most quoted valuation number in the stock market. It tells you how many dollars investors pay for each dollar of a company’s annual profit. A high P/E usually means investors expect strong growth; a low P/E can mean a bargain — or a business in trouble. This entry explains how to calculate P/E, trailing vs. forward versions, and how to use it without being misled.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- PE ratio, Earnings multiple, Valuation multiple
- Updated
P/E in plain words
Divide the share price by earnings per share, usually the last 12 months. It is a way of judging whether a price is high or low compared with the past or with other companies.1 A $60 share with EPS of $4 has a P/E of 15.
Earnings per share is net profit divided by the number of common shares.2 See Earnings per Share.
How to use P/E, step by step
Calculate it
Share price ÷ EPS.
Know which EPS
Trailing (past 12 months) or forward (next 12 months, estimated).
Compare with peers
Companies in the same industry are the fairest comparison.
Compare with history
A company’s P/E today vs. its own past range.
Consider growth
Faster-growing companies usually trade on higher P/Es.
Check earnings quality
One-off profits can make P/E look artificially low. See Free Cash Flow.
Worked examples
Example 1 — The calculation
CalculationShare price $90, trailing EPS $4.50, forward EPS estimate $6.00.
| Trailing P/E | $90 ÷ $4.50 = 20 |
| Forward P/E | $90 ÷ $6.00 = 15 |
Expected growth makes the forward P/E lower than the trailing one.
Example 2 — The value trap
TrapA stock trades at a P/E of 6, far below peers at 15. A year later earnings halve and the price falls 30%.
| Looked like | A bargain |
| Turned out | Earnings in decline |
A low P/E often reflects expected problems. Check why it is low.
Example 3 — Paying for growth
GrowthCompany A: P/E 35, EPS growing 30% a year. Company B: P/E 12, EPS flat.
| A in three years (same price) | P/E ≈ 35 ÷ 1.3³ ≈ 16 |
| B in three years (same price) | P/E 12 |
A high P/E can be reasonable if growth delivers. See Earnings.
Reading P/E levels (very rough guide)
| Aspect | Often means | But check |
|---|---|---|
| Low P/E | Cheap or low expectations | Declining earnings or risk |
| Average P/E | In line with the market | Sector norms differ |
| High P/E | High growth expectations | Whether growth is realistic |
| Negative / no P/E | Losses | Use other measures |
How P/E is used
Quick valuation
Comparing price to profit in one number.
Peer comparison
Spotting expensive or cheap companies in a sector.
Market valuation
The P/E of an index shows how richly the market is priced.
Rate sensitivity
High-P/E stocks are often more sensitive to interest rates. See Interest Rate.
Advantages and disadvantages
Advantages
- Simple and widely available.
- Useful for comparing similar companies.
- Links price directly to profit.
Disadvantages
- Meaningless when earnings are negative.
- Distorted by one-off items.
- Ignores debt and cash flow.
- Not comparable across very different industries.
Going deeper
Read as far as you need. Each level builds on the one before it.
Earnings yield
Beginner
The inverse of P/E is the earnings yield: a P/E of 20 means earnings of 5% of the price. It is a handy way to compare with bond yields.
Cyclical companies
Intermediate
For cyclical businesses, P/E often looks lowest at the peak of profits and highest at the bottom — the opposite of the right signal. Look at earnings across a full cycle.
Growth-adjusted P/E
Advanced
Dividing P/E by the expected growth rate (the PEG ratio) tries to adjust for growth, but it depends heavily on forecasts that may be wrong.
Common mistakes
Buying just because P/E is low
Find out why.
Comparing across industries
Use sector peers.
Mixing trailing and forward P/E
Compare like with like.
Ignoring one-off profits
Check whether earnings are repeatable.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- P/E = share price ÷ earnings per share.
- Trailing uses past earnings; forward uses estimates.
- Compare with peers and the company’s own history.
- Low P/E can be a trap; high P/E can be justified by growth.
- It does not work for loss-making companies.
Frequently asked questions
What is a good P/E ratio?
Why do tech stocks have high P/Es?
Can P/E be negative?
Further learning
- Earnings per Share
The denominator of P/E.
- Fundamental Analysis
Where valuation ratios fit.
- Earnings
How earnings reports move P/E.
- Dividend Yield
Another way to compare price with income.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Price-Earnings (P/E) Ratio (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Earnings Per Share (glossary) (opens in a new tab) Checked .
Read more elsewhere
- Investopedia: Price-to-Earnings (P/E) Ratio (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.