Price to Earnings Ratio (P/E)

The Price to Earnings Ratio tells you what the market is willing to pay for the company’s earnings and is commonly used to determine if a company’s stock price is over or undervalued.

  • 1 year P/E should be LT 10
  • 5 year P/E should be LT 20

For instance, if a stock has a P/E of 15, then the market is willing to pay 15 times its earnings for the stock.  Often a P/E of no more than 15 is considered a good value.

P/E = Stock Price per Share/

Earnings per Share (EPS) for a 12 month period (usually the last 12 months, or trailing twelve months (TTM))

High P/E – Companies with a high P/E ratio are typically growth stocks.  A high P/E indicates companies with good growth potential because investors are willing to pay a premium for future profits. Often these stocks are considered overvalued.

Low P/E – A lower P/E ratio indicates either a bargain, a troubled company, or a very steady consistent company.

Zero P/E – Companies with a zero P/E  are losing money

Forward P/E –  The forward P/E uses the estimates of Wall Street analysts of what the company’s next earnings per share report will be instead of using the company’s last reported earnings per share (TTM).

  • If the forward P/E is lower than the P/E TTM it means future earnings are expected to be higher than the recently completed annual earnings and the stock is about to become a bargain.
  •  If the forward P/E is higher than the P/E TTM, it means the company is expected to earn less over the coming year than it did in the past year.

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