Price-to-Earnings Ratio (PE)

What is the Price-to-Earnings Ratio (PE Ratio)?

The PE Ratio (Price-to-Earnings ratio) measures how much investors are willing to pay for each dollar of a company's earnings. It is the most widely used financial ratio in stock analysis and is often the first metric investors check when evaluating a stock.

A PE ratio of 20x means investors are paying 20forevery20 for every 1 of annual earnings the company generates. Higher PE ratios indicate the market expects higher future growth, while lower PEs suggest the market expects slower growth or perceives higher risk.

The PE ratio is a foundational metric in value investing. Benjamin Graham, the father of value investing, considered it essential for comparing stocks across different industries and identifying potential bargains. Warren Buffett has noted that while he looks at many metrics, the PE ratio provides a useful starting point for understanding how the market is pricing a business.

PE Ratio Calculator

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PE Ratio Calculator

Frequently Asked Questions

What is a good PE ratio?
A PE below 15 is often considered undervalued, while above 25 may be overvalued. Always compare within the same industry, as tech stocks typically trade at higher PE ratios than utility companies.
What is the difference between trailing PE and forward PE?
Trailing PE uses the earnings from the past 12 months, while forward PE uses estimated future earnings. Forward PE can give investors a better sense of expected growth but relies on analyst projections that may not be accurate.
Can a PE ratio be negative?
Yes. A negative PE ratio means the company is losing money (negative earnings). In that case, the PE ratio is generally not meaningful for valuation purposes, and investors should look at other metrics like revenue growth or price-to-sales ratio.
Why do growth stocks have high PE ratios?
Growth stocks trade at higher PE ratios because investors expect their earnings to grow rapidly in the future. The high price reflects anticipated future profits rather than current earnings.
What is the PE ratio of the S&P 500?
The S&P 500 PE ratio fluctuates with market conditions. The long-term historical average is around 16-17x trailing earnings. During bull markets it can exceed 25-30x, and during recessions it can drop below 12x. The Shiller CAPE ratio, which uses 10-year average earnings, provides a more stable comparison.
Is PE ratio or PEG ratio better?
The PEG ratio is often more useful for growth stocks because it adjusts the PE for expected earnings growth. A stock with a PE of 30 and 30% growth has a PEG of 1.0 (fair), while a PE of 30 with 10% growth has a PEG of 3.0 (expensive). For mature, stable companies, the standard PE ratio is sufficient.
Romain Simon
Written by Romain Simon

Founder of Beanvest. Self-directed investor since 2015, building tools to help individual investors make better decisions.

Last updated: March 24, 2026| Editorial process
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