Glossary
P/E Ratio
The P/E ratio compares a company's stock price to its earnings per share. A high P/E suggests investors expect high growth; a low P/E suggests the stock is cheap or the company is in trouble.
The Price-to-Earnings (P/E) ratio is the most widely used equity-valuation metric. It compares a company's current share price to its earnings per share (EPS) and answers the question: how many dollars am I paying for one dollar of annual profit?
Formula
P/E = Stock Price / Earnings Per Share (EPS)
A company trading at $150 with EPS of $6 has a P/E of 25 — investors are willing to pay $25 for every $1 of current earnings.
The three P/E flavors
| Variant | Denominator | Best for |
|---|---|---|
| Trailing P/E (TTM) | Last 12 months of reported earnings | Stable, mature companies |
| Forward P/E | Consensus next-12-month estimate | Growth names, recent IPOs |
| Shiller P/E (CAPE) | 10-year average inflation-adjusted earnings | Long-term market valuation |
How to read it
- High P/E (30+) — investors expect high future growth, or the market is expensive overall, or the company has a low current EPS (a temporary dip).
- Low P/E (< 10) — the stock is cheap, or the company is in structural decline, or earnings are temporarily inflated by a one-time gain.
- Negative P/E — the company lost money; P/E is meaningless until profitability returns.
Compare P/E within the same industry. Tech companies routinely trade at 25-40× earnings, while banks trade at 8-15×. A 10× P/E is "expensive" for a bank and "cheap" for a SaaS company.
Limitations
- P/E is useless for early-stage growth companies (negative EPS) and distorted by capital structure (use EV/EBITDA for leveraged firms).
- It ignores growth rate — a 20× P/E on a 30% grower is cheaper than 10× on a 0% grower. Use the PEG ratio (P/E divided by growth) to compensate.
- It is backward-looking by default; recessions, write-offs, and one-time gains distort trailing EPS.
PEG ratio
PEG = P/E ÷ Annual EPS Growth Rate (%)
A PEG < 1 is generally considered undervalued; PEG > 2 is expensive. The S&P 500 historically trades at a PEG of ~1.5.
See also
- Market Cap — what a company is worth at today's price.
- Forecast estimates — target-date model estimates.
- How to read a stock forecast — dates, ranges and horizons.