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P/E Ratio

In short

Price-to-Earnings — how much you pay for each dollar of earnings

Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.

The Price-to-Earnings ratio divides stock price by earnings per share (EPS). It tells you how many years of current earnings you're paying for. Compare within the same sector — tech stocks typically trade at higher P/Es than utilities.

Formula

P/E = Stock Price ÷ EPS

Thresholds

<15
Undervalued or declining business
15-25
Fair value for mature companies
25-40
Growth premium
>40
Overvalued unless exceptional growth

Related concepts

  • P/B Ratio — If a company owns $10 of net assets per share and the stock costs $15, the P/B is 1.5. Below 1 can mean you're paying less than the accounting value of what the company owns — though it can also mean the market expects those assets to lose value or earn poor returns.
  • PEG Ratio — If a stock has a P/E of 30 and analysts expect 30% annual earnings growth, its PEG is 1.0 — a fair multiple for that growth rate. A stock with the same P/E of 30 but only 10% expected growth has a PEG of 3.0, meaning investors are paying far more per unit of growth.
  • EV/EBITDA — Like P/E but for the entire company including its debt. A company with lots of debt looks cheap on P/E but expensive on EV/EBITDA — this ratio tells the full story.
  • Earnings Per Share (EPS) — If a company earns $1 billion and has 100 million shares, each share 'earned' $10. Growing EPS over time is a main driver of stock price growth — but check whether it's coming from more profit or just fewer shares outstanding after buybacks, since both raise the number.