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What Is a P/E Ratio?

P/E ratios, sometimes called price or earnings multiples, measure a company’s value by comparing the share price against its earnings per share (EPS). Investors can use P/E ratios as one measure of a stock’s relative value. 

P/E ratios, explained

The P/E, or price-to-earnings, ratio measures how much investors are willing to pay per $1 of company earnings. For instance, if a company trades at 15x earnings, then investors will pay $15 per share for every $1 the company earns. 

Calculating the P/E ratio

The “P” in P/E ratio stands for the current market price of a single share of stock. “E” stands for EPS, or the company’s 12-month earnings divided by the average number of outstanding shares. 

To calculate a company’s P/E ratio, simply divide P (share price) by E (earnings per share).

For instance, say that Company X trades at $100 and its current EPS is $10. The P/E ratio would be 10x ($100/$10), signifying that investors will pay $10 for every $1 Company X earns. 

Types of P/E ratios

You can calculate several types of P/E ratios, including: 

  • Trailing twelve month (TTM) ratios, which measure a company’s P/E ratio over the last year. Unfortunately, past performance doesn’t guarantee future results. 
  • Forward P/E ratios, which measure the expected net earnings for the coming year. The drawback is that there’s no guarantee the company will perform as expected. 
  • CAPE or Shiller P/E ratios, which measure a company’s average inflation-adjusted earnings over the last ten years. Shiller P/E ratios are often applied to the S&P 500 index. 

Another variation is the PEG (price-to-earnings to growth) ratio. The PEG ratio measures a company’s value based on current and future expected earnings. However, its major downside is that it relies on future growth that may never materialize.  

What this means for you

P/E ratios are useful because they offer a standardized method of comparing stocks across prices and earnings levels. Investors and analysts often use P/E ratios to determine a stock’s relative valuation and inform whether it’s over- or under-valued. 

For example, companies with high P/E ratios have high share prices compared to earnings. These companies may be overvalued, or simply growth stocks on their way up. By contrast, companies with low P/E ratios have low share prices compared to earnings. These may be undervalued value stocks, or simply poorly-performing firms. 

One important note for using P/E ratios is that they’re most accurate when comparing companies in the same industry. Each industry has a “normal” P/E range that may differ greatly from another’s. 

For instance, if you compared AT&T and Exxon’s P/E ratios, you might think one is the clear “winner.” But the reality may simply be that they’re different, not better. 

P/E ratios offer a standardized method for comparing stocks or funds with different prices, EPS levels and market caps. But it’s not a perfect measurement – and you shouldn’t rely on a single ratio to inform your trading decisions. 

If you’re not interested in doing the math and comparing stocks by hand (trust us, we don’t blame you), offers a simple solution. Our artificial intelligence crunches the numbers for you –all you have to do is sign up, commit capital and let us invest for you.

Disclosures is the trade name of Quantalytics Holdings, LLC., LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of's investment advisory services.

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