P/E Ratio (Price-to-Earnings)
Definition
A valuation metric that compares a company's current stock price to its earnings per share, indicating how much investors are willing to pay per dollar of earnings.
The price-to-earnings (P/E) ratio is the most widely used stock valuation metric. It's calculated as: P/E = Stock Price / Earnings Per Share (EPS). A company trading at $100 with $5 EPS has a P/E of 20, meaning investors pay $20 for every $1 of earnings.
There are two types: trailing P/E (uses the last 12 months of actual earnings) and forward P/E (uses analyst estimates of next year's earnings). Forward P/E is more useful for fast-growing companies where past earnings don't reflect future potential.
What's a "good" P/E depends on context. The S&P 500's historical average is roughly 15-17. Growth stocks often trade at 30-60+ P/E because investors expect rapid earnings growth. Value stocks typically have P/E ratios of 8-15. Companies with no earnings (pre-profit startups) have no meaningful P/E ratio.
Comparing P/E across industries is misleading — tech companies naturally trade at higher P/E ratios than utilities or banks. Always compare a company's P/E to its industry peers and its own historical range.
The cyclically adjusted P/E (CAPE or Shiller P/E) uses 10-year average inflation-adjusted earnings to smooth out business cycle effects, providing a better long-term valuation perspective. As of 2025, the CAPE ratio remains above historical averages, suggesting elevated but not unprecedented market valuations.
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Frequently Asked Questions
Is a high P/E ratio good or bad?
Neither inherently. A high P/E (30+) means investors expect strong future growth — justified if the company delivers, but risky if it doesn't. A low P/E (under 15) might indicate a bargain or a company with declining prospects. Context and comparison to peers matter more than the absolute number.
Why do some stocks have no P/E ratio?
Companies with negative earnings (losses) can't have a meaningful P/E ratio. You can't divide by a negative number and get useful information. For unprofitable companies, investors use alternative metrics like price-to-sales, price-to-book, or enterprise value to revenue.