What Is the P/E Ratio?
The P/E (price-to-earnings) ratio is one of the most widely used metrics to judge whether a stock is expensive or cheap. This guide explains what the P/E ratio is, how it's calculated, how to interpret it, and how to screen stocks by P/E.
What is the P/E ratio and how is it calculated?
P/E ratio = Share Price ÷ Earnings Per Share (EPS). For example, a company trading at $100 with EPS of $10 has a P/E of 10.
The P/E shows how much an investor pays for $1 of the company's earnings. A P/E of 10 is roughly read as 'at this earnings pace, the investment pays for itself in 10 years'.
What do high and low P/E mean?
A low P/E often suggests a stock may be 'cheap' relative to its earnings, but it can also reflect concerns about the company's future.
A high P/E can mean investors expect strong future growth, but an excessively high P/E is a warning that the stock may be expensive or overvalued.
How to interpret P/E correctly
- Compare within the sector: P/E averages differ by industry.
- Growth: Fast-growing companies naturally carry higher P/Es.
- History: Compare with the company's own historical P/E range.
- Not alone: Combine it with debt, cash flow and dividend metrics.
Limitations of the P/E ratio
If a company is losing money, earnings are negative and the P/E becomes meaningless (or negative). One-off gains or charges can also distort the P/E.
That's why the P/E should never be used alone, but as part of a holistic analysis.
How to screen stocks by P/E
In Heaticker's free screener, click the 'P/E' column to sort stocks from lowest to highest. On the same screen you can also filter by dividend yield, volume and 52-week range to quickly find reasonably valued candidates.
Click any stock to also see its price, chart and news.
Frequently Asked Questions
What is a good P/E ratio?
There's no single 'right' number; it varies by sector and growth expectations. A P/E of 8 may be cheap in one sector while 25 is normal in another. What matters is comparing with peers and the company's own history.
Does a low P/E always mean a stock is cheap?
No. A low P/E can reflect market concerns about the company's future (a value trap). Evaluate a low P/E alongside debt, cash flow and growth.
Can the P/E ratio be negative?
Yes. If a company is unprofitable, EPS is negative and the P/E becomes negative/meaningless. Other valuation methods are used in that case.
How do I screen by P/E?
In Heaticker's screener, sort by the P/E column and combine it with dividend, volume and 52-week filters to find reasonably valued stocks in seconds.
Not investment advice. For informational purposes only; not a buy/sell recommendation. Data may be delayed.