Glossary
Price-to-earnings ratio (P/E)
Share price divided by earnings per share: how many dollars investors pay for each dollar of a company’s annual profit.
The price-to-earnings ratio (P/E) divides a stock's price by its earnings per share. It tells you how many dollars the market is paying for one dollar of the company's yearly profit, which makes it the most widely quoted shorthand for whether a stock looks expensive or cheap relative to its earnings.
How it works
The "trailing" P/E uses EPS from the last four reported quarters. The forward P/E uses analysts' estimates for the next twelve months or the next fiscal year.
Flip the ratio and you get the earnings yield: 1 ÷ 20 = 5%. That form makes it easy to compare a stock with a bond yield.
How to read it
A P/E only means something in context. Compare it with:
- the company's own history,
- peers in the same Sector, since banks and software firms trade at very different multiples, and
- the broad market, whose P/E has varied widely over the decades.
A high P/E can signal strong expected growth, or an expensive stock. A low P/E can mean a bargain, or a business the market expects to shrink.
What to watch for
- Negative earnings. A company with losses has no meaningful P/E; most data sites show it as blank or "N/A."
- One-off items. A large gain or write-down distorts EPS for a year. Some investors use adjusted (Non-GAAP earnings) earnings instead, which brings its own risks.
- Cyclical peaks. Cyclical companies often look cheapest on P/E right at the top of their earnings cycle.