What is a good P/E ratio?

There's no single right number. Compare the company with its sector, its own historical P/E and its growth rate.

If the company has a loss, EPS is negative and P/E is usually shown as N/A. Such companies are valued with revenue- or cash-flow-based metrics.

Should I buy stocks with a low P/E?

A low P/E is only the start of the analysis. First understand why earnings are valued low — sometimes the market expects profits to fall.

Analysis

What is P/E ratio?

P/E

In short

Price divided by earnings per share. Shows how many dollars investors pay for each $1 of profit.

Also known as: price to earnings

P/E (price to earnings) is the ratio of a stock's price to its earnings per share. It shows how many dollars investors are paying for each $1 of the company's profit.

Formula

P/E = share price ÷ EPS
The inverse is the earnings yield = EPS ÷ price

Trailing P/E uses actual EPS over the last 12 months; forward P/E uses analysts' estimates for the next 12 months.

How to read it

A high P/E means the market expects fast growth; a low P/E means little growth is expected, or the stock may be cheap. But "low P/E = cheap" isn't always true: if profits are about to fall, a low P/E can be a value trap. To factor in growth, use PEG.

Limitations

For a loss-making company (negative EPS), P/E is meaningless.
One-off gains or losses can distort EPS and therefore P/E.
Compare only within a sector: typical P/Es for tech companies and banks differ greatly.

P/E and PEG: which is "cheap"? (example)

A: slow growth (3% a year)12x · PEG 4.0

B: moderate growth (15%)25x · PEG 1.7

C: fast growth (40%)60x · PEG 1.5

A has the lowest P/E but is the most expensive relative to growth (PEG). Read P/E together with growth, not alone.

One price — three P/Es (Nur Tech, $50)

Trailing P/E — last 12 months25x · $50 ÷ $2.00

Forward P/E — next year20x · $50 ÷ $2.50 (estimate)

Two years ahead16.7x · $50 ÷ $3.00 (estimate)

The price is the same. Only the EPS it is divided by changes: last year's (actual) or a future one (an analyst estimate — which can be wrong).

Example

Illustrative: Company A trades at $60 with EPS of $3.

P/E = $60 ÷ $3 = 20. Investors pay $20 for each $1 of profit.
Earnings yield = $3 ÷ $60 = 5%.
If analysts expect EPS of $4 next year: forward P/E = $60 ÷ $4 = 15.

Company B: price $30, EPS $1 → P/E 30. Its share price looks cheaper than A's, but relative to profit it's more expensive: $30 per $1 of earnings versus $20 for A.

Mistakes and tips

Don't use P/E alone — look at growth, debt and earnings quality alongside it.
A share price alone says nothing about cheap or expensive; a $30 stock can be pricier than a $600 one.
Forward P/E rests on estimates — when estimates change, so does the ratio.

Frequently asked questions

What is a good P/E ratio?: There's no single right number. Compare the company with its sector, its own historical P/E and its growth rate.
Can P/E be negative?: If the company has a loss, EPS is negative and P/E is usually shown as N/A. Such companies are valued with revenue- or cash-flow-based metrics.
Should I buy stocks with a low P/E?: A low P/E is only the start of the analysis. First understand why earnings are valued low — sometimes the market expects profits to fall.

Learn it in the Academy

This term is covered with hands-on examples and a quiz in these lessons of the interactive course.

Valuation: P/E, P/S, EV/EBITDA and PEGIs a stock expensive or cheap? Trailing vs forward P/E, P/S, P/B, P/FCF, EV/EBITDA, PEG, earnings yield, historical ranges and valuing a company with scenarios.Open lesson · 13 min

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Related terms

EPS