Understanding the P/E Ratio: The Definitive Guide

The Price-to-Earnings Ratio (P/E) is the most popular fundamental indicator for evaluating whether a stock is cheap or expensive. But beware: misinterpreted, it can mislead you.

This article is part of our Complete Guide: How to Analyze a Stock

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What is the P/E Ratio?

The P/E ratio compares the stock price to earnings per share (EPS).

P/E = Stock Price / Earnings Per Share (EPS)

Concrete example:

Apple (AAPL) stock at $180

EPS (earnings per share) = $6

P/E = 180 / 6 = 30x

This means you're paying 30 times the company's annual earnings.

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How to Interpret the P/E?

Reading Grid

P/EInterpretationTypical Examples < 10Very cheap or problemsBanks, energy, value traps 10-15UndervaluedMature industries 15-25Average valuationMost blue chips 25-40Growth anticipatedTech, innovative pharma > 40Hyper-growth or bubbleTesla, startups

Traps to Avoid

1. Comparing different sectors A P/E of 40 for tech can be reasonable, but excessive for a bank. 2. Ignoring growth A P/E of 30 with 30% growth (PEG = 1) is better than a P/E of 15 with 5% growth (PEG = 3). 3. Exceptional earnings A one-time profit (asset sale) can distort the P/E. Look at the forward P/E (based on forecasts).

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P/E Variants

Trailing P/E (TTM)

Based on the last 12 months of earnings. The most common.

Forward P/E

Based on projected earnings for the next 12 months. More relevant for growth companies.

PEG Ratio

PEG = P/E / Annual Earnings Growth Rate

PEGInterpretation < 1Undervalued relative to growth 1-2Normal valuation > 2Overvalued

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Concrete Examples

Let's compare three tech giants (fictional data for illustration):

StockPriceEPSP/EGrowthPEG AAPL$180$6.0030x10%3.0 MSFT$380$10.0038x15%2.5 GOOGL$140$5.6025x12%2.1 Analysis:

Apple has the lowest P/E but highest PEG (slower growth)

Google appears best valued considering growth

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When the P/E Doesn't Work

The P/E is unusable in these cases:

Unprofitable companies: No EPS = undefined P/E (Amazon for 20 years)

Very cyclical earnings: Auto, commodities

Restructurings: Exceptional charges

Holdings: Complex structure

Alternatives:

P/S (Price-to-Sales) for startups

EV/EBITDA for indebted companies

P/B (Price-to-Book) for banks

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Practical Application

My P/E Checklist

Calculate Trailing and Forward P/E

Compare to sector (not overall market)

Calculate PEG to integrate growth

Check the trend (P/E rising or falling?)

Look at history of the stock over 5 years

Where to Find the P/E?

Our stock analyses include real-time P/E

Yahoo Finance

TradingView

Morningstar

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Conclusion

The P/E is an excellent starting point, but never a single criterion. Combine it with:

Growth (PEG)

Balance sheet quality

Sector trends

Risk analysis

Also read: Complete Guide: How to Analyze a Stock in 2026

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Explore our 443 stock analyses to see each company's real-time P/E.