A:

Yes, a stock can have a negative price-to-earnings ratio (P/E), but it is very unlikely that you will ever see it reported. Although negative P/E ratios are mathematically possible, they generally aren't accepted in the financial community and are considered to be invalid or just not applicable. We'll explain why this is.

The price-earnings ratio is arguably the most popular fundamental factor used by investors who try to determine the attractiveness of an asset's current value and, more importantly, whether the current price level makes for a good buying opportunity. The ratio is calculated by dividing a financial asset's current share price by its per-share earnings. Generally speaking, a low P/E value suggests that an investor needs to pay a low amount for each dollar of earnings made by the company. This could be used by investors as a sign that the given asset is undervalued and a potentially good investment at current levels. Conversely, a relatively high P/E value is used to suggest that investors will need to pay a high amount for the company's earnings, which can then be used to suggest that the asset is relatively expensive and that it may be a good idea to wait for a better entry.

Mathematically, there are only two ways for a ratio of this form to have a negative value:

  1. The numerator falls below zero
  2. The denominator falls below zero.

In the case of the P/E ratio, it is impossible for the numerator to fall below zero because this represents the price of the asset. However, the denominator, which is equal to the earnings of the company, can become negative. EPS values below zero mean that the company is losing money and is the reason why it is possible to have a negative P/E ratio.

Negative EPS numbers are usually reported as "not applicable" for quarters in which a company reported a loss. Investors buying a company with a negative P/E should be aware that they are buying a share of a company that has been losing money per share of its stock.

For further reading, see our tutorials on Understanding the P/E Ratio and Ratio Analysis.

RELATED FAQS
  1. How can the price-to-earnings (P/E) ratio mislead investors?

    A low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it ... Read Answer >>
  2. What does it mean when "N/A" appears for a company's P/E ratio?

    A "N/A" reported in a stock's price-to-earnings ratio (P/E), can mean one of two things. The first, and simplest, would be ... Read Answer >>
  3. What is the difference between forward p/e and trailing p/e?

    Understand the difference between the trailing P/E ratio, which is the standard price-to-earnings calculation, and the forward ... Read Answer >>
  4. How can I find the P/E ratio on an ETF's underlying index?

    Learn how analysts and investors can determine the price-to-earnings ratio for the underlying index of an exchange-traded ... Read Answer >>
  5. What is the average price-to-earnings ratio in the automotive sector?

    Learn the average price-to-earnings ratio for the automotive sector and how it is used to evaluate a company’s potential ... Read Answer >>
  6. What is the average price-to-earnings ratio in the food and beverage sector?

    Learn what the average price-to-earnings ratio is in the food and beverage sector and why other measures such as median should ... Read Answer >>
Related Articles
  1. Investing

    Beware False Signals From The P/E Ratio

    The P/E ratio is a simple tool for evaluating a company, but no one ratio can tell the whole story.
  2. Investing

    Getting On The Right Side Of The P/E Ratio Trend

    Buying at the right time is crucial, but how do we know when that is?
  3. Investing

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  4. Investing

    How Do I Calculate the Price-Earnings Ratio?

    If Apple is trading at $108.73 per share, and its trailing twelve months' EPS is $6.45, calculate the P/E ratio as...
  5. Investing

    Comparing the P/E, EPS And Earnings Yield

    Here are three ratios that help investors value stock returns.
  6. Investing

    Is Stock With a Lower P/E Always A Better Choice?

    Is a stock with a lower P/E always a better investment than a stock with a higher one? The short answer is no, but it depends on a few things.
  7. Investing

    5 Must-Have Metrics For Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  8. Investing

    The 4 Basic Elements of Stock Value

    Investors use these four measures to determine a stock's worth. Find out how to use them.
RELATED TERMS
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  2. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  3. P/E 10 Ratio

    A valuation measure, generally applied to broad equity indices, ...
  4. Key Ratio

    A mathematical ratio that illustrates and summarizes the current ...
  5. Valuation

    The process of determining the current worth of an asset or company. ...
  6. Franchise Factor

    The measurement of the impact on a company's price-earnings (P/E) ...
Hot Definitions
  1. Price Elasticity Of Demand

    A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center