What is a P/E ratio?
In one line: The P/E (price-to-earnings) ratio is a stock's share price divided by its earnings per share, showing how much buyers pay for each $1 of profit.
A simple example
A stock trades at $60. Over the last 12 months, the company earned $3 per share.
$60 ÷ $3 = a P/E of 20.
Buyers are paying $20 for every $1 of yearly profit. Another way to see it: at the same earnings, it would take 20 years of profit to equal the share price.
Now compare a second company. Price $60, earnings $6 per share. Its P/E is 10.
Trailing vs forward P/E
- Trailing P/E uses the last 12 months of real earnings.
- Forward P/E uses what analysts expect the next 12 months to be. That's a guess, and guesses change.
Why it matters
P/E is a quick way to see what the market expects. A high P/E often means buyers expect earnings to grow fast. A low one often means they expect slow growth, or worry about the business.
It also moves with the bigger picture. When interest rates rise, buyers often pay less for future earnings, and P/E ratios across the market tend to shrink. See how interest rates affect stocks.
It works best when you compare similar companies. Tech firms and utilities usually carry very different P/Es. More in what moves stock prices.
A common mistake
Thinking low P/E means cheap and high P/E means expensive. A P/E of 8 can be low for a good reason: earnings may be about to fall. A P/E of 40 can reflect a business growing fast.
The number is a starting question, not an answer.
If a company lost money, it has no meaningful P/E. Most sites show "N/A" or leave it blank.
Questions
What is a good P/E ratio?
There's no single good number. It depends on the industry and how fast the company grows. Compare it with similar companies and with its own history.
What does a negative P/E mean?
The company had a loss, so earnings per share are below zero. The ratio stops being useful, and most sites don't show it.
What is the P/E of the S&P 500?
It changes every day with prices and earnings. Over long stretches it has often sat somewhere in the high teens to low 20s, but it has been far outside that range too.
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