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In this article, we'll cover price-to-earnings (P/E) ratio, including the price earnings ratio definition, the P/E ratio calculation, what is a good P/E ratio and "Why is P/E ratio important?"

Many investors enjoy picking stocks. But knowing which stocks to choose can challenge even the most experienced investor, because investor sentiment can move a stock in irrational ways.

You can take the emotion out of your stock selections. One way to do that is to look at fundamental metrics like a stock’s price-to-earnings (P/E) ratio. While not a perfect indicator of a stock’s future performance, it can provide a barometer of how retail and institutional investors feel about a particular stock.

## What is a P/E Ratio?

So, what is P/E ratio? The price-to-earnings ratio measures how much you pay for $1 of a company’s earnings. Therefore, when a company has a P/E ratio of 15, its shareholders pay $15 for every dollar of company earnings.

Value investors use a stock’s P/E ratio to determine its valuation. The ratio reveals how a stock’s value compares with the industry average or a benchmark index.

## Calculating the P/E Ratio

The two components of the P/E ratio are a company’s stock price and its earnings per share over a period of time (usually 12 months).

Stock price (the "P" in the P/E ratio) tells investors how much it will cost them to buy one share of a company’s stock.Earnings per share (the "E" in the ratio) gives investors an idea of how valuable those shares are.

### P/E Ratio Formula

With that in mind, how is P/E ratio calculated? The formula is:

Stock price/EPS = P/E ratio

## How to Analyze P/E Ratio

A stock’s P/E ratio doesn’t tell the whole story. Some investors have other favorite metrics, such as price-to-book ratio or price-to-earnings, including growth (or PEG) ratio. Look at a company’s P/E ratio and other data, such as a company’s debt-to-equity ratio.

Analyzing the significance of a P/E ratio is similar to assigning importance to a batting average in baseball or softball. P/E ratio helps predict future outcomes but cannot help you fully evaluate a stock.

One reason is that the two components of a P/E ratio (stock price and earnings per share) will depend, in part, on what type of company you analyze. A company with fast-growing earnings will command a higher P/E ratio than a company with slow but steady revenues.

You may also want to look at how the P/E ratio of a stock compares to others in its sector. You would expect the market share leader in a sector to have a higher P/E ratio than the fifth- or sixth-highest company by market share.

### How is the Trailing P/E Ratio Different than the Forward P/E Ratio?

You use the earnings per share of the last four quarters to calculate the price-to-earnings ratio, a metric normally referred to as trailing earnings per share. The most commonly displayed P/E ratio is a trailing P/E ratio. Trailing P/E is based on the most recent four quarters of earnings. In all but one quarter of the year, the P/E ratio reflects earnings occurring in the current fiscal year and those that the company delivered in the prior fiscal year.

Some investors use a different metric, the forward P/E ratio, which comes from the company’s guidance. It’s common for company management to issue earnings forecasts for subsequent quarters. Investors and analysts can use these numbers to calculate a forward P/E ratio. It gives investors an idea of the company's confidence in the profit forecast over the next four quarters.

For investors looking to take a long position in a company’s stock, the forward P/E ratio may be more valuable than its current P/E ratio. By contrast, short-term traders may care more about current P/E ratios because they want to profit in the short term.

## How to Use the P/E Ratio Calculator

The MarketBeat P/E ratio calculator is a tool that investors and traders can use to find the current market value of a stock. MarketBeat publishes a series of calculators, such as the MarketBeat compound interest calculator, the MarketBeat inflation calculator and the MarketBeat market capitalization calculator, creating a one-stop site for investors to research stocks.

The MarketBeat P/E calculator is intuitive, but here are step-by-step instructions:

### Step 1: Enter the ticker symbol directly.

If you know the ticker symbol of the stock you’re looking for, enter that into the “Choose a Stock to Populate Sell Price” field. MarketBeat will populate the tool from its search engine to give you the current market P/E ratio for that stock.

### Step 2: Enter the share price.

As we noted above, this is the current price at which the stock trades. You don’t need to think about it beyond that. However, note that this price will frequently change during the trading day.

### Step 3: Enter the total earnings per share for the measured time period.

If you’re on the MarketBeat site, you can find this by looking at the "Earnings" tab on the profile page for the particular stock you've chosen.

## P/E Ratio Calculation Examples

Here are a couple of examples using stock prices and EPS values as of December 16, 2022:

Tesla Inc. (NASDAQ: TSLA) has a share price of $150.47, and its total EPS for its last four quarters is $3.34. You can calculate its P/E ratio as follows:

150.47/3.34 = 45.05

PepsiCo Inc. (NASDAQ: PEP) has a share price of $179.03 and a total EPS of $6.65. You can calculate its P/E ratio as follows:

179.03/6.65 = 26.92

It’s that simple. All the information needed to calculate a stock’s P/E ratio is readily available to investors. The math is just as simple as shown above.

## The P/E Ratio is the Start of Your Stock Research

Now that you know the answer to "How is P/E ratio calculated?", you’re at the beginning of your stock research. P/E ratio is like a batting average in baseball. It’s one of several metrics that investors use in determining whether a stock is valued correctly.

For a complete understanding of P/E ratio, investors need to know about the stock sector, the average P/E ratio for that sector and how the company fits into that sector. You’ll also want to know if you are looking at a trailing or forward price-to-earnings ratio.

Once you do that, you should still combine the P/E ratio with other metrics to get a more accurate sense of a stock’s value.

## FAQs

Let's take a look at some of the most frequently asked questions about P/E ratio.

### What is a good P/E ratio?

Many factors help you decide if a stock’s P/E ratio is good or bad. One consideration is the P/E ratio compared to other stocks in its sector. This means you’ll want to compare stocks in the same sector. For example, instead of comparing **ExxonMobil Corporation (NYSE: XOM)** with **The Coca-Cola Company (NYSE: KO)**, you may compare it to **Chevron Corporation (NYSE: CVX)** — the same sector.

Another consideration is the average P/E ratio for the sector. For example, technology stocks tend to have a higher P/E ratio than utility stocks. Therefore, tech stocks will have higher P/E ratios. To better understand if the stock is a good investment, you’ll want to look at the pace of earnings growth and whether that appears to slow, accelerate or stay the same.

Another factor that may affect a P/E ratio is whether or not a stock pays dividends. Dividends come out of a company’s earnings. You would expect companies that pay dividends to have a lower P/E ratio than stocks that don’t pay dividends.

### Why do we calculate P/E ratio?

Why is P/E ratio important? Earnings growth may be the most significant factor in determining if a stock is likely to rise in price. Companies with a history of increasing earnings are more desirable to own. P/E ratio tells investors how much they pay for $1 of those earnings.

### What P/E ratio is too low?

Just like trying to assign a good P/E ratio, there are many answers to what makes a P/E ratio too low. When comparing two stocks, value investors will likely lean toward the stock with the lower P/E ratio. Growth investors, on the other hand, may lean toward investing in the stock with a higher P/E ratio.

### What if the P/E ratio is negative?

A company with a negative P/E ratio is not profitable — the company is losing money. By itself, this doesn’t mean that you should avoid the stock. Many companies go public while still in the early stages of growth.

It does mean that you have to carefully scrutinize the company’s business model to see how likely it will become profitable and, if so, how long it will take for them to get there. You also want to assess the company’s cash flow situation. In some cases, a company will have to issue new shares or a reverse stock split which is dilutive to shareholder equity.

When analyzing companies with a negative P/E ratio, you may want to look at its price-to-book (P/B) ratio, which assigns a valuation to a company based on its book value — the company’s total assets minus total liabilities. However, this is only useful with companies that have a strong link between their assets and their ability to generate income.

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## FAQs

### How do you use the PE ratio to evaluate stocks? ›

The P/E ratio is calculated by **dividing the stock's current price by its latest earnings per share**. A high P/E ratio suggests that investors see it as a growth stock. It may also mean that the stock is overvalued. The average P/E of S&P 500 Index stocks is 25.

**What does PE ratio tell you about a stock? ›**

The P/E ratio **helps investors determine whether the stock of a company is overvalued or undervalued compared to its earnings**. The ratio is a measurement of what the market is willing to pay for the current operations as well as the prospective growth of the company.

**How do you analyze stocks before buying? ›**

**How to do Fundamental Analysis of Stocks:**

- Understand the company. It is very important that you understand the company in which you intend to invest. ...
- Study the financial reports of the company. ...
- Check the debt. ...
- Find the company's competitors. ...
- Analyse the future prospects. ...
- Review all the aspects time to time.

**What is a good PE ratio for stock growth? ›**

So, what is a good PE ratio for a stock? A “good” P/E ratio isn't necessarily a high ratio or a low ratio on its own. The market average P/E ratio currently ranges from **20-25**, so a higher PE above that could be considered bad, while a lower PE ratio could be considered better.

**How do you know if a stock is overvalued? ›**

Price-book ratio (P/B)

To calculate it, divide the market price per share by the book value per share. A stock could be overvalued **if the P/B ratio is higher than 1**.

**Does high PE ratio mean overvalued? ›**

PE ratio example

If a company's PE ratio is significantly higher than its peers, there's a chance the stock is overvalued. Another way to understand PE ratio: It's a measure of how much investors are paying for every $1 of a company's earnings. Imagine two similar companies in the same sector.

**Is it good to buy high PE ratio? ›**

**A high P/E ratio can be a good indicator of a company with good growth prospects**. However, it is not enough to look at the P/E ratio alone. Ensure that you analyze the financials and fundamentals of the company and its competition to determine its growth prospects. This can help you make a more informed decision.

**How do you evaluate stock quickly? ›**

The most common way to value a stock is to **compute the company's price-to-earnings (P/E) ratio**. The P/E ratio equals the company's stock price divided by its most recently reported earnings per share (EPS). A low P/E ratio implies that an investor buying the stock is receiving an attractive amount of value.

**How does Warren Buffett analyze stocks? ›**

Buffett **looks for companies that provide a good return on equity over many years**, particularly when compared to rival companies in the same industry. When looking for a great company to invest in, Buffett also reviews a company's profit margins to ensure they are healthy and growing.

**What are the two methods of stock analysis? ›**

There are two basic types of stock analysis: **fundamental analysis and technical analysis**.

### What is Tesla's PE ratio? ›

**13, 2023**.

**Why is Amazon PE ratio so high? ›**

34 One of the reasons Amazon's P/E is so much higher than Apple's is that **its efforts to expand aggressively on a wide scale have helped keep earnings somewhat suppressed and the P/E ratio high**. The P/E ratio should be used with a variety of other analysis tools to analyze a stock.

**What if PE ratio is too high? ›**

Price Earnings (P/E) ratio is one of the most popular ways of valuing a stock. The thumb rule is that a low P/E ratio is a sign of undervaluation while a high P/E ratio is a sign of overvaluation. But such an approach of purely using P/E Ratio to Value a stock is fraught with risks.

**What are signs of an undervalued stock? ›**

A stock could be undervalued if the **P/B ratio is lower than 1**. P/B ratio example: ABC's shares are selling for $50 a share, and its book value is $70, which means the P/B ratio is 0.71 ($50/$70).

**What indicates a stock is undervalued? ›**

An undervalued stock is defined as **a stock that is selling at a price significantly below what is assumed to be its intrinsic value**. For example, if a stock is selling for $50, but it is worth $100 based on predictable future cash flows, then it is an undervalued stock.

**How do you tell if a stock is a good buy? ›**

**Here are nine things to consider.**

- Price. The first and most obvious thing to look at with a stock is the price. ...
- Revenue Growth. Share prices generally only go up if a company is growing. ...
- Earnings Per Share. ...
- Dividend and Dividend Yield. ...
- Market Capitalization. ...
- Historical Prices. ...
- Analyst Reports. ...
- The Industry.

**At what PE ratio is a stock overvalued? ›**

Investors and analysts consider stocks which have a P/E ratio of **50 or above** to be an overvalued share, especially in comparison to a stock which has a ratio at par with or below 10. As it allows investors to determine that its share prices are considerably higher than what a company can afford to pay as dividends.

**What is a good PE ratio negative? ›**

What does negative pe ratio mean? A negative P/E ratio means that **the company reported either no earnings per share (EPS) or negative EPS**. It often means the company made no money over the last 12 months.

**What is the average PE ratio for the S&P 500? ›**

The current S&P500 10-year P/E Ratio is **29.7**. This is 47% above the modern-era market average of 19.6, putting the current P/E 1.2 standard deviations above the modern-era average. This suggests that the market is Overvalued. The below chart shows the historical trend of this ratio.

**What is McDonald's PE ratio? ›**

The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure. McDonald's PE ratio **as of February 10, 2023 is 25.98**. Please refer to the Stock Price Adjustment Guide for more information on our historical prices.

### What is considered a cheap PE ratio? ›

Whether a P/E ratio is high or low will depend on the industry it's in. However, in general, stocks with P/E ratios of **below 15** are considered cheap, while stocks above about 18 are thought of as overpriced.

**Is 8 a good PE ratio? ›**

Although **eight is a lower P/E, and thus technically a more attractive valuation**, it's also likely that this company is facing financial difficulties leading to the lower EPS and the low $2 stock price. Conversely, a high P/E ratio could mean a company's stock price is overvalued.

**What does a high PE ratio tell you? ›**

A high P/E ratio might indicate that **a stock's price is high relative to its earnings and potentially suggests that the stock is overvalued**. On the other hand, a low P/E ratio might mean that a stock is undervalued.

**Is it good if PE ratio is high? ›**

**A high P/E ratio can be a good indicator of a company with good growth prospects**. However, it is not enough to look at the P/E ratio alone. Ensure that you analyze the financials and fundamentals of the company and its competition to determine its growth prospects. This can help you make a more informed decision.