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What Is a P/E Ratio?

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed

The P/E ratio, or price-to-earnings ratio, is one of the most common valuation shortcuts in stock research. It compares what investors are paying for a share with how much profit the company earns per share.

How the P/E ratio is calculated

The basic formula is:

  • P/E ratio = stock price ÷ earnings per share

If a stock trades at $50 and the company earned $5 per share over the measured period, the P/E ratio is 10. In plain English, investors are paying about 10 times that earnings figure.

You may see trailing P/E, based on past earnings, and forward P/E, based on analyst estimates or company expectations. Forward P/E depends on forecasts, so it can change quickly when expectations change.

What P/E can help you ask

P/E can be useful for comparing companies with similar business models. It can help you ask whether the market is paying more for faster growth, steadier profits, stronger margins, or a better balance sheet.

But P/E is not a verdict. A low P/E can reflect a cheap stock, a shrinking business, a one-time earnings spike, or a market that expects trouble. A high P/E can reflect optimism, durable growth, or an overextended price.

When P/E is less useful

P/E can break down when a company has no profits, very cyclical profits, major one-time gains or losses, or accounting items that distort earnings. In those cases, read the filings and compare revenue, cash flow, margins, debt, and management's discussion.

Use P/E as one question in a research checklist, not as the whole answer.

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