Who this is for — Equity investors comparing «what the market pays» per dollar of earnings. P/E is the most quoted multiple — and the most misused without context.
The P/E ratio (price-to-earnings) is share price / earnings per share (EPS) — trailing (last 12 months) or forward (analyst estimate). It measures how many times the market capitalizes current or expected earnings.
In plain terms — «How many years of current earnings would repay the price» — useful metaphor, not a standalone fair value formula.
Variants and reading
| Type | Formula | Note |
|---|---|---|
| Trailing P/E | Price / EPS TTM | Historical, realized |
| Forward P/E | Price / estimated EPS | Depends on consensus |
| Sector P/E | vs peers | Different growth and margins |
| Market P/E | broad index | Risk-on/off regime |
High P/E can reflect expected growth (growth), low P/E value or distress. Capital-intensive vs software sectors are not comparable with one magic threshold.
Limits
- Negative EPS → P/E undefined
- Accounting distortions (one-offs, stock-based comp)
- Rates and inflation shift aggregate multiples (macro)
- Does not replace DCF or fair value
Common mistake — Buying «low P/E» without checking debt, growth and earnings quality — value trap.
Example — Stock A P/E 12 vs sector 20: looks cheap — but EPS includes extraordinary gain; normalized P/E 18, less attractive.
Card
- Use with: growth, margins, FCF, peers.
- Avoid: universal thresholds (P/E < 10 = buy).
- Hub: Fundamental analysis.