What is the 'PriceEarnings Ratio  P/E Ratio'
The priceearnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its pershare earnings. The priceearnings ratio is also sometimes known as the price multiple or the earnings multiple.
The P/E ratio can be calculated as: Market Value per Share / Earnings per Share
BREAKING DOWN 'PriceEarnings Ratio  P/E Ratio'
In essence, the priceearnings ratio indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings. This is why the P/E is sometimes referred to as the price 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.
To calculate the P/E ratio, the earnings per share (EPS) must be known. EPS is most often derived from the last four quarters. This form of the priceearnings ratio is called trailing P/E, which may be calculated by subtracting a company’s share value at the beginning of the 12month period from its value at the period’s end, adjusting for stock splits if there have been any. Sometimes, priceearnings can also be taken from analysts’ estimates of earnings expected during the next four quarters. This form of priceearnings is called a projected or forward P/E. A third, less common variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Let's calculate the P/E ratio for WalMart Stores Inc. (NYSE:WMT), as of November 14, 2017 when the company's stock price closed at $91.09. The company's profit for the fiscal year ended January 31, 2017 was $13.64 billion and its number of shares outstanding is 3.1 billion. Its EPS can be calculated as $13.64 billion / 3.1 billion = $4.40. WalMart's P/E ratio is, therefore, $91.09/$4.40 = 20.70.
You can track the P/E ratios for the stocks in your portfolio or individual stocks by adding them to your own 'Watchlist'. Here we list the top and bottom three companies in the S&P 500 by P/E ratio. This list updates daily based upon movements in the stock prices, so adding stocks you are interested in to your Watchlist is the best way to keep an eye on them.
Investor Expectations
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. A low P/E can indicate either that a company may currently be undervalued or that the company is doing exceptionally well relative to its past trends. When a company has no earnings or is posting losses, in both cases P/E will be expressed as “N/A.” Though it is possible to calculate a negative P/E, this is not the common convention.
The priceearnings ratio can also be seen as a means of standardizing the value of one dollar of earnings throughout the stock market. In theory, by taking the median of P/E ratios over a period of several years, one could formulate something of a standardized P/E ratio, which could then be seen as a benchmark and used to indicate whether or not a stock is worth buying.
Learn more about evaluating and picking the right stocks for your portfolio in Investopedia Academy's Find Great Value Stocks online course.
Limitations of 'PriceEarnings Ratio  P/E Ratio'
Like any other fundamental designed to inform investors as to whether or not a stock is worth buying, the priceearnings ratio comes with a few important limitations that are important to take into account, as investors may often be led to believe that there is one single metric that will provide complete insight into an investment decision, which is virtually never the case.
One primary limitation of using P/E ratios emerges when comparing P/E ratios of different companies. Valuations and growth rates of companies may often vary wildly between sectors due both to the differing ways companies earn money and to the differing timelines during which companies earn that money. As such, one should only use P/E as a comparative tool when considering companies within the same sector, as this kind of comparison is the only kind that will yield productive insight. Comparing the P/E ratios of a telecommunications company and an energy company, for example, may lead one to believe that one is clearly the superior investment, but this is not a reliable assumption.
An individual company’s P/E ratio is much more meaningful when taken alongside P/E ratios of other companies within the same sector. For example, an energy company may have a high P/E ratio, but this may reflect a trend within the sector rather than one merely within the individual company. An individual company’s high P/E ratio, for example, would be less cause for concern when the entire sector has high P/E ratios.
Moreover, because a company’s debt can affect both the prices of shares and the company’s earnings, leverage can skew P/E ratios as well. For example, suppose there are two similar companies that differ primarily in the amount of debt they take on. The one with more debt will likely have a lower P/E value than the one with less debt. However, if business is good, the one with more debt stands to see higher earnings because of the risks it has taken.
Another important limitation of priceearnings ratios is one that lies within the formula for calculating P/E itself. Accurate and unbiased presentations of P/E ratios rely on accurate inputs of the market value of shares and of accurate earnings per share estimates. While the market determines the value of shares and, as such, that information is available from a wide variety of reliable sources, this is less so for earnings, which are often reported by companies themselves and thus are more easily manipulated. Since earnings are an important input in calculating P/E, adjusting them can affect P/E as well.
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 2025 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.
 You can expand your financial vocabulary by subscribing to our Term of the Day newsletter.

P/E 30 Ratio
P/E 30 ratio means that a company's stock price is trading at ... 
Forward Price To Earnings  Forward ...
A measure of the pricetoearnings ratio (P/E) using forecasted ... 
Trailing PriceToEarnings  Trailing ...
The sum of a company's pricetoearnings, calculated by taking ... 
Franchise Factor
The measurement of the impact on a company's priceearnings (P/E) ... 
Price Multiple
A price multiple is any ratio that uses the share price of a ... 
Rule Of 18
A rule whereby the sum of the inflation rate and the P/E ratio ...

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. 
Investing
How Do I Calculate the PriceEarnings 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... 
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? 
Investing
Are Stocks with Low P/E Ratios Always Better?
Is a stock with a lower P/E ratio always a better investment than a stock with a higher one? The short answer is no. The long answer is it depends. 
Investing
Differences Between Forward P/E And Trailing P/E
The most common types of price to earnings ratios are forward P/E and trailing P/E. Find out how they differ and the advantages and drawbacks of each. 
Investing
Understanding The P/E Ratio
Learn what the price/earnings ratio really means and how you should use it to value companies.

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 pricetoearnings calculation, and the forward ... Read Answer >> 
Absolute P/E Ratio Vs. Relative P/E Ratio
The difference between absolute P/E and relative P/E is easier when you know why each term is used. Read Answer >> 
What is the average pricetoearnings ratio in the financial services sector?
Learn how to calculate and use the price to earnings (P/E) ratio when analyzing an investment and what the financial services ... Read Answer >> 
How do companies benefit from price discrimination?
Learn what the average pricetoearnings ratio is for the insurance sector and why the average pricetoearnings ratio should ... Read Answer >> 
What is the average pricetoearnings ratio in the telecommunications sector?
Discover the average trailing and forward pricetoearnings ratios for the telecommunications sector and the usefulness of ... Read Answer >> 
What pricetoearnings ratio is average in the aerospace sector?
Find out what the average pricetoearnings ratio is for companies in the aerospace sector and the importance of comparing ... Read Answer >>