What is a P/E ratio?
A P/E ratio compares a company's stock price with its earnings per share to show what investors are paying for profits.
The short version
P/E means price-to-earnings. It is calculated as stock price divided by earnings per share. A P/E of 20 means investors are paying about 20 dollars for every 1 dollar of annual earnings, based on the earnings measure used.
Trailing vs. forward
Trailing P/E uses past earnings. Forward P/E uses expected future earnings. Forward numbers can be more relevant for growing companies, but they depend on analyst estimates that can be wrong.
High and low are not automatic signals
A high P/E can reflect strong growth expectations, durable margins, or investor enthusiasm. A low P/E can reflect value, but it can also reflect declining profits, debt, cyclicality, or weak confidence.
When P/E fails
P/E is less useful for companies with negative earnings, banks with special accounting, cyclical commodity businesses near peak profits, or early-stage growth companies where revenue growth matters more than current profit.
What to compare
Compare P/E with growth, margins, balance sheet strength, free cash flow, sector averages, interest rates, and the company's own history.