P/E Ratio: the most popular valuation metric
Price-to-Earnings (P/E) ratio is the most widely used stock valuation metric. It tells you how much investors are willing to pay for each dollar of earnings.
The Formula
P/E Ratio = Stock Price ÷ Earnings Per Share (EPS)
Example: A stock trading at $100 with EPS of $5 has a P/E of 20x.
Trailing vs Forward P/E
- Trailing P/E (TTM): Uses actual earnings from the past 12 months. More reliable but backward-looking.
- Forward P/E: Uses estimated future earnings. Better for growth stocks but depends on analyst accuracy.
What is a "Good" P/E Ratio?
Always compare P/E to industry peers and historical averages.
Limitations of P/E
- Doesn't work for unprofitable companies
- Earnings can be manipulated through accounting
- Ignores debt levels and cash on balance sheet
- Doesn't account for growth rate (use PEG ratio instead)
FAQs
What is a good P/E ratio?
It depends on the industry. Generally, P/E under 15 is cheap, 15-25 is fair, above 25 is expensive.
Why do some stocks have negative P/E?
Negative P/E means the company has losses. Look at Price-to-Sales or Price-to-Book instead.
Intrinsic Investor is for educational purposes only. Not financial advice.
Cite This Page
Intrinsic Investor (https://www.intrinsic-investor.com/learn/pe-ratio) - P/E Ratio Explained: What is a Good P/E Ratio?
APA Style
Intrinsic Investor. (2024). P/E Ratio Explained: What is a Good P/E Ratio?. Intrinsic Investor. Retrieved from https://www.intrinsic-investor.com/learn/pe-ratio
MLA Style
"P/E Ratio Explained: What is a Good P/E Ratio?." Intrinsic Investor, April 1, 2024, https://www.intrinsic-investor.com/learn/pe-ratio.
BibTeX
@misc{intrinsic_investor_learn_pe-ratio,
author = {Intrinsic Investor},
title = {P/E Ratio Explained: What is a Good P/E Ratio?},
year = {2024},
url = {https://www.intrinsic-investor.com/learn/pe-ratio},
note = {Accessed: January 9, 2026}
}