What Is the P/E Ratio?
The price-to-earnings (P/E) ratio is a company’s share price divided by its earnings per share over the last year. A P/E of 20 means investors pay $20 for each $1 of yearly profit. It is the most common quick measure of how expensive a stock is.
Today the S&P 500's P/E, through SPY, is 24.9.
How to calculate it
P/E = share price ÷ earnings per share. Equivalently, it is market cap ÷ net income. A company earning $5 a share whose stock trades at $100 has a P/E of 20.
The inverse, earnings ÷ price, is the earnings yield: a P/E of 20 is a 5% earnings yield, which makes stocks easier to compare with bond yields.
Trailing and forward P/E
Trailing P/E uses the last twelve months of reported earnings. Forward P/E uses analysts’ estimates for the next twelve months. Forward P/E is usually lower for a growing company, but it rests on forecasts that can be wrong.
A company with losses has no meaningful P/E; it is usually shown as blank rather than negative.
What is a good P/E ratio?
It depends on growth and on the industry. Fast-growing companies trade at high P/Es because their earnings are expected to rise; slow-growing or cyclical ones trade at low P/Es. Compare a company with its own industry and its own history, not with the market as a whole.
Over the long run the S&P 500’s P/E has averaged in the mid-teens, but it has spent most of the last decade above 20. A low P/E can mean a bargain or a business in decline; the P/E alone can’t tell you which.
Put it to use
Value stocks: low P/E and price-to-book →The S&P 500 today, with its P/E →General information, not investment advice.