P/E Ratio (Price-to-Earnings)
Stock price divided by annual earnings per share. Shows how much you pay per $1 of earnings. Low P/E may be cheap, high may be overvalued.
What You Need to Know
Price-to-Earnings (P/E) ratio divides stock price by earnings per share (EPS). Shows how much investors pay for each dollar of company earnings.
Formula: Stock Price / Annual EPS. If stock trades at $100 and company earns $5 per share, P/E is 20. You pay $20 for every $1 of annual earnings.
P/E Interpretation:
- 10-15: Value territory, potentially undervalued
- 15-25: Market average, fairly valued
- 25-40: Growth premium, high expectations
- 40+: Expensive or high-growth speculation
Context matters. Tech stocks average P/E of 25-35 (growth expected). Utilities average 12-18 (mature, slow growth). Compare P/E to industry average, not absolute numbers.
Low P/E doesn't always mean "cheap." Could signal declining business, sector problems, or cyclical downturn. High P/E doesn't always mean "expensive." Could indicate strong growth prospects, competitive advantages, or innovation.
Use P/E with other metrics: growth rate, profit margins, debt levels, and competitive position.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/price-earnings-ratio
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