Understanding the P/E Ratio: Complete Guide for Investors

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

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.

How to Interpret the P/E?

Reading Grid

P/E	Interpretation	Typical Examples
< 10	Very cheap or problems	Banks, energy, value traps
10-15	Undervalued	Mature industries
15-25	Average valuation	Most blue chips
25-40	Growth anticipated	Tech, innovative pharma
> 40	Hyper-growth or bubble	Tesla, 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).

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

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

Concrete Examples

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

Stock	Price	EPS	P/E	Growth	PEG
AAPL	$180	$6.00	30x	10%	3.0
MSFT	$380	$10.00	38x	15%	2.5
GOOGL	$140	$5.60	25x	12%	2.1

Analysis:

Apple has the lowest P/E but highest PEG (slower growth)
Google appears best valued considering growth

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

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

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

Explore our 436 stock analyses to see each company's real-time P/E.