Calculate price-to-earnings (P/E) ratio for stock valuation. Compare a stock's P/E to industry averages and understand what it means for investors.
Potentially overvalued
At current earnings, it would take 30 years of profits to equal the stock price.
P/E ratio comparison
P/E interpretation guide
The price-to-earnings (P/E) ratio is one of the most widely used stock valuation metrics. It compares a company's stock price to its earnings per share (EPS), showing how much investors are willing to pay for each dollar of earnings.
A P/E of 25 means investors pay $25 for every $1 of annual earnings. You can also think of it as the number of years of current earnings needed to equal the stock price.
Uses earnings from the past 12 months (trailing twelve months). This is the most common form and reflects actual reported earnings.
Uses analyst estimates for next 12 months' earnings. Useful for fast-growing companies but relies on predictions.
Cyclically Adjusted P/E uses 10-year average inflation-adjusted earnings. Smooths out business cycle fluctuations.
| P/E range | Typical interpretation |
|---|---|
| < 10 | Deep value or distressed |
| 10-15 | Value stock |
| 15-20 | Fair value (average) |
| 20-25 | Growth stock |
| 25-35 | High growth expectations |
| > 35 | Very high growth or speculation |
| Index/Market | Historical P/E |
|---|---|
| S&P 500 | 15-17 (long-term avg) |
| S&P 500 | 20-25 (recent years) |
| NASDAQ | 25-35 |
| Russell 2000 | 15-20 |
Different industries have different typical P/E ranges:
| Sector | Typical P/E |
|---|---|
| Utilities | 15-18 |
| Financials | 10-15 |
| Healthcare | 18-25 |
| Consumer Staples | 18-22 |
| Industrials | 16-22 |
| Technology | 25-40+ |
| Consumer Discretionary | 20-30 |
Always compare a stock's P/E to its industry peers, not the overall market.
The inverse of P/E is earnings yield:
| P/E | Earnings yield |
|---|---|
| 10 | 10% |
| 15 | 6.7% |
| 20 | 5% |
| 25 | 4% |
| 30 | 3.3% |
Earnings yield is useful for comparing stocks to bond yields.
High-growth companies command higher P/E ratios. Investors pay more today for expected future earnings growth.
Riskier companies often trade at lower P/E ratios. The discount compensates for uncertainty.
When rates rise, P/E ratios tend to fall. Bonds become more attractive alternatives, and future earnings are discounted more heavily.
Bull markets push P/E ratios higher; bear markets compress them.
Earnings can be manipulated through accounting choices, affecting P/E reliability.
P/E doesn't work when earnings are negative. Use price-to-sales or price-to-book instead.
Companies can manage earnings through accounting. Always look at cash flow too.
P/E ignores debt levels. Use EV/EBITDA for better comparisons across capital structures.
During economic peaks, cyclical companies have low P/E (high earnings). At troughs, P/E is high (low earnings). This can be misleading.
A low P/E isn't automatically cheap if the company is declining.
The Price/Earnings-to-Growth (PEG) ratio adjusts P/E for growth:
| PEG | Interpretation |
|---|---|
| < 1.0 | Potentially undervalued |
| 1.0 | Fairly valued |
| > 1.0 | Potentially overvalued |
Example: A stock with P/E of 30 and 30% growth has PEG = 1.0 (fair). A stock with P/E of 30 and 15% growth has PEG = 2.0 (expensive).
| Metric | Formula | Best for |
|---|---|---|
| P/E | Price ÷ EPS | Profitable companies |
| P/S | Price ÷ Sales | Unprofitable growth |
| P/B | Price ÷ Book Value | Asset-heavy companies |
| EV/EBITDA | Enterprise Value ÷ EBITDA | Comparing across debt levels |
| EV/Sales | Enterprise Value ÷ Revenue | High-growth tech |
A P/E of 30 might be cheap for tech but expensive for utilities.
Is the P/E expanding or contracting? What's the 5-year average?
Use PEG or compare P/E to growth rates.
Are earnings sustainable? Growing? Generated from operations?
P/E is one tool. Combine with cash flow analysis, balance sheet review, and qualitative assessment.