The P/E ratio (Price Earnings Ratio) indicates how many years of earnings an investor pays to acquire a stock. A P/E of 20 means the stock is worth 20 times the annual earnings per share. It only makes sense when compared to a sector or a history.
How is the P/E calculated?
P/E = stock price ÷ earnings per share (EPS). It is used on past (trailing) or expected (forward) earnings.
Is a high P/E necessarily bad?
No. A high P/E can be justified by strong expected growth. A low P/E may hide a declining company (a value trap). The raw figure says nothing without context.
What to compare the P/E with?
What pitfalls to avoid?
The P/E is unusable if earnings are negative or volatile. For cyclical or unprofitable companies, the EV/EBITDA or price/sales ratio is preferred. Never compare the P/E of two different sectors.
How to use it in a decision?
The P/E serves to measure the margin of safety, not to time a purchase. An expensive stock can keep rising for quarters. Always combine it with earnings and financial quality.
This is not investment advice.