Price-Earnings Ratio - P/E Ratio

AAA

DEFINITION of 'Price-Earnings Ratio - P/E Ratio'

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

Market Value per Share / Earnings per Share (EPS)

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Also sometimes known as "price multiple" or "earnings multiple."

INVESTOPEDIA EXPLAINS 'Price-Earnings Ratio - P/E Ratio'

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Things to Remember

  • Generally a high P/E ratio means that investors are anticipating higher growth in the future.
  • The average market P/E ratio is 20-25 times earnings.
  • The P/E ratio can use estimated earnings to get the forward looking P/E ratio.
  • Companies that are losing money do not have a P/E ratio.

For more on P/E ratios, check out How can the P/E ratio mislead investors?

VIDEO

Loading the player...
RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
  3. P/E 10 Ratio

    A valuation measure, generally applied to broad equity indices, ...
  4. Technical Analysis of Stocks and ...

    The academic study of historical chart patterns and trends of ...
  5. Market Value Of Equity

    The total dollar market value of all of a company's outstanding ...
  6. P/E 30 Ratio

    The price-to-earnings (P/E) ratio is the valuation ratio of a ...
RELATED FAQS
  1. What is the average price-to-earnings ratio in the drugs sector?

    The pharmaceutical industry provides investors a vast array of value investing opportunities, from companies that focus on ... Read Full Answer >>
  2. How exactly do I use the price to sales ratio to evaluate a stock?

    The price to sales (P/S) ratio is a valuation metric that compares the price of a company’s stock to the total dollar value ... Read Full Answer >>
  3. Why has the price to sales ratio become a more popular metric than it was in the ...

    The price-to-sales (P/S) ratio gained popularity during the technology boom of the 1990s when many companies with future ... Read Full Answer >>
  4. What is considered a favorable price to sales ratio?

    Price to sales (P/S) ratios between 1 and 2 are generally considered good, and ratios less than 1 are considered excellent. ... Read Full Answer >>
  5. What is the average price-to-earnings ratio in the financial services sector?

    The price to earnings ratio is one of the most common metrics used by investors to analyze whether investment in a company ... Read Full Answer >>
  6. How does ratio analysis make it easier to compare different companies?

    Ratio analysis provides an investor with tools to analyze a company's financial statements. Investors use ratios to evaluate ... Read Full Answer >>
  7. What other investment metrics are best used in conjunction with net margin?

    Some of the metrics that are best used in conjunction with net margin include the operating profit margin, the price to book ... Read Full Answer >>
  8. What metrics can be used to evaluate companies in the financial services sector?

    Two of the best metrics that can be used to evaluate companies in the financial services sector are the price-to-book (P/B) ... Read Full Answer >>
  9. Why would a value investor be drawn to the financial services sector?

    A value investor is drawn to investing in the financial services sector for two principal reasons. First, financial service ... Read Full Answer >>
  10. What value metrics are best for analyzing companies in the metals and mining sector?

    Discounted cash flow (DCF) analysis is often applied to companies in the mining business because accurate evaluation of a ... Read Full Answer >>
  11. What are examples of popular companies in the forest products sector?

    As a growing alternative asset class, investment in companies that engage in the forestry industry is increasing in popularity. ... Read Full Answer >>
  12. What is the average price-to-book ratio in the railroads sector?

    Railroads generally have solid price-to-book, or P/B, ratios a bit above the 2.0 level; these levels are considered "good" ... Read Full Answer >>
  13. Why is the PEG (price to earnings growth) ratio something I should be looking at ...

    The price/earnings to growth, or PEG, ratio is something that should be looked at when evaluating a given stock, because ... Read Full Answer >>
  14. What is considered a good PEG (price to earnings growth) ratio?

    The price/earnings to growth, or PEG, ratio is a very useful stock valuation measure investors and analysts can use to get ... Read Full Answer >>
  15. Over what duration should I be examining a given stock's PEG (price to earnings growth) ...

    When comparing investment candidates or simply determining whether the current market price of a stock is overvalued or undervalued, ... Read Full Answer >>
  16. What is the average price-to-earnings ratio in the oil & gas drilling sector?

    The energy sector provides unique opportunities for individuals interested in value investing, especially with companies ... Read Full Answer >>
  17. What's the difference between book and market value?

    Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other ... Read Full Answer >>
  18. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  19. How can the price-to-earnings (P/E) ratio mislead investors?

    The price-to-earnings (P/E) ratio is calculated by dividing a company’s stock price per share by its earnings per share (EPS), ... Read Full Answer >>
  20. 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 Full Answer >>
  21. Why are P/E ratios generally higher during times of low inflation?

    Inflation affects equity prices in several ways. Most importantly, investors are willing to pay less for a certain level ... Read Full Answer >>
  22. Where can I find the P/E ratios for the Dow and S&P 500?

    When it comes to valuing stocks, the price-to-earnings (P/E) ratio is one of the oldest and most frequently used metrics. ... Read Full Answer >>
  23. Can a stock have a negative price-to-earnings (P/E) ratio?

    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. ... Read Full Answer >>
  24. Stocks with high P/E ratios can be overpriced. Is a stock with a lower P/E always ...

    The short answer? No. The long answer? It depends. The price-to-earnings ratio (P/E ratio) is calculated as a stock's current ... Read Full Answer >>
  25. Is maximizing stock price the same thing as maximizing profit?

    Simply put: yes. A company's stock price will factor in many different variables including the type of industry the firm ... Read Full Answer >>
  26. What's the difference between absolute P/E ratio and relative P/E ratio?

    The simple answer to this question is that absolute P/E, which is the most quoted of the two ratios, is the price of a stock ... Read Full Answer >>
Related Articles
  1. Investing

    Ratio Analysis

    Ratio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
  2. Investing

    Debt Ratio

    The debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
  3. Investing

    Using The Current Ratio

    Find out more on how this liquidity ratio is used to measure a company's ability to pay short-term obligations.
  4. Fundamental Analysis

    Ratio Analysis Tutorial

    If you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
  5. Investing

    PEG Ratio

    Learn more about how this ratio is used to determine a stock's value based on its earnings growth.
  6. Fundamental Analysis

    The Value of Profitability Ratios

    How is a company being run? Is it generating profits? The answer to these questions lies in analyzing the profitability ratios of a company.
  7. Markets

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  8. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  9. Forex Education

    Using The Price-To-Book Ratio To Evaluate Companies

    The P/B ratio can be an easy way to determine a company's value, but it isn't magic!
  10. Investing Basics

    How To Find P/E And PEG Ratios

    If these numbers have you in the dark, these easy calculations should help light the way.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center