The P/E ratio (price-to-earnings) tells you how many times a company's annual profit the market is paying for its shares. A P/E of 20 means that at today's price the share is worth 20 years of current earnings per share. On its own the number does not say whether a stock is expensive: it only makes sense compared with the sector, the stock's own history and the growth expected.
How is the P/E calculated?
P/E = share price ÷ earnings per share (EPS)
Market capitalisation divided by net income gives the same result. Two versions coexist, and it always pays to know which one you are reading:
| Version | Earnings used | Strength | Weakness |
|---|---|---|---|
| Trailing P/E | Earnings of the last 12 reported months | Observed, verifiable | Looks backwards |
| Forward P/E | Earnings analysts expect over the next 12 months | Includes the outlook | Rests on estimates, often too optimistic |
The inverse of the P/E, the earnings yield (earnings ÷ price), compares directly with an interest rate: a P/E of 20 is an earnings yield of 5%. That is one reason market P/Es tend to fall when rates rise (see how interest rates affect stocks).
A worked example: a fictitious company
Take Company D, a fictitious company whose shares trade at €50.
| Item | Value | Calculation |
|---|---|---|
| EPS, last 12 months | €2.50 | — |
| Trailing P/E | 20.0 | 50 ÷ 2.50 |
| EPS expected in 12 months | €3.00 | — |
| Forward P/E | 16.7 | 50 ÷ 3.00 |
| Earnings yield | 5.0% | 2.50 ÷ 50 |
| Expected annual EPS growth | 15% | — |
| PEG | 1.33 | 20.0 ÷ 15 |
| Sector median P/E | 24 | — |
| P/E relative to sector | 0.83 | 20.0 ÷ 24 |
Company D trades 17% below its sector median on past earnings, and its P/E drops to 16.7 if expected earnings materialise. These numbers do not say the stock is "cheap": they say what the market pays today, and what growth would be needed to justify that price. If the forecasts are too optimistic, the forward P/E is wrong, and so is the apparent discount.
What to compare the P/E with
| Comparison | Question | Trap |
|---|---|---|
| The sector | Does the company trade above or below its peers? | All the peers may be expensive, or cheap |
| Its own history | Is it pricier or cheaper than usual? | The company may have changed (growth, margins, debt) |
| Growth (PEG) | Is the price consistent with expected growth? | Growth is an estimate |
| The market | Is it pricier than the index? | Index composition changes |
The PEG divides the P/E by expected annual earnings growth, in percent. A PEG near 1 is often read as a price consistent with growth; above 2, the market is paying a lot for each point of growth. It is a useful marker for fast growers, whose raw P/E always looks high.
Is a high P/E always bad?
No. A high P/E can reflect strong, lasting growth, high margins, little debt or a very predictable business: the market is willing to pay more for better-quality earnings. Conversely, a low P/E can signal a company whose decline the market expects: the value trap. The level of the P/E is never enough; what matters is why it sits there.
Classic traps
- Cyclical companies. At the top of the cycle earnings are unusually high and the P/E looks low; at the bottom it is the reverse. For a carmaker, a steelmaker or a miner, a low P/E can mark peak earnings rather than a bargain.
- One-off items. A disposal gain or a one-time impairment distorts a year's earnings. Underlying earnings, excluding non-recurring items, are a better base.
- Negative or near-zero earnings. The P/E then means nothing. Enterprise value to EBITDA (EV/EBITDA), price to sales or a cash-flow valuation (DCF) work better.
- Debt. The P/E ignores leverage: two companies on the same P/E, one debt-free and one heavily indebted, do not carry the same risk. EV/EBITDA corrects for this.
- Buybacks. They shrink the share count and lift EPS without net income growing.
- Cross-sector comparisons. A software company's P/E and a bank's do not compare.
What is a good P/E ratio? Sector medians
There is no good P/E in absolute terms, but there are orders of magnitude. On 7 November 2026, across the 589 large companies InvestIQ follows (S&P 500, CAC 40, Nasdaq-100 names), the median P/E was 23.6, and 9% of companies had no positive P/E. Sectors differ widely:
| Sector | Companies | Median P/E |
|---|---|---|
| Real estate | 32 | 31.7 |
| Technology | 111 | 31.3 |
| Basic materials | 27 | 31.0 |
| Healthcare | 65 | 29.1 |
| Industrials | 92 | 26.1 |
| Consumer defensive | 39 | 21.9 |
| Utilities | 33 | 20.9 |
| Consumer cyclical | 59 | 19.7 |
| Energy | 28 | 15.2 |
| Communication services | 27 | 15.1 |
| Financial services | 76 | 13.6 |
A P/E of 20 is high for a bank and moderate for a software company. These medians are updated monthly on the stock market statistics page; for a wider universe and long series, Aswath Damodaran's data (NYU Stern) is the reference. And to see what growth a P/E implies, the reverse DCF calculator works it out from the price.
How InvestIQ uses the P/E
In InvestIQ's engine, valuation weighs 12% of the score. The P/E enters relative to the sector's (35% of the valuation group), because a raw P/E says nothing without a benchmark. For fast growers (revenue up more than 30% or a P/E above 50) the engine replaces the discounted-cash-flow measure with the PEG. Enterprise value to EBITDA completes the group. The details are in the methodology.
In short
The P/E is the best-known valuation ratio because it is simple: how many years of earnings the market is paying. That simplicity is also its limit. Know which earnings it uses, compare it sensibly, beware of cycles and one-off items, and complete it with other measures. A P/E measures a price, never the quality of the business: for that, see the Piotroski F-Score or ROIC.
Educational guidance only, not investment advice.
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Frequently asked questions
There is no good P/E in absolute terms. On 7 November 2026, the median P/E of the 589 large companies InvestIQ follows was 23.6, from 13.6 for financials to 31.7 for real estate. A P/E is compared with the sector, the stock's history and expected growth.
The trailing P/E uses earnings of the last 12 reported months; the forward P/E uses the earnings analysts expect over the next 12 months. The second includes the outlook but relies on estimates, often too optimistic.
The P/E is then unusable. Enterprise value to EBITDA, price to sales or a cash-flow valuation (DCF) work better.
The P/E divided by expected annual earnings growth, in percent. A PEG near 1 is often read as a price consistent with growth; above 2, each point of growth comes at a high price.
