P/E ratio
Stock price relative to earnings per share.
The P/E ratio (price-to-earnings ratio) compares a stock's price to the earnings the company generated per share over the last twelve months. In plain terms, it shows how many dollars an investor is paying today for each dollar of current annual earnings.
A P/E of 20 means the market is willing to pay 20 years of current earnings to own that share. A P/E of 10 means ten. High P/E can reflect strong growth expectations; low P/E can signal an undervalued stock — or weak prospects. The ratio alone doesn't tell you which.
Worked example
Apple (AAPL) trades around $300 per share as of May 17, 2026, with trailing EPS of about $7.50. P/E = 300 ÷ 7.50 = 40.
For context, the US tech sector trades at a median P/E around 28, and the S&P 500 as a whole near 22. Apple commands a premium: analysts collectively expect earnings growth in the coming years. If that growth fails to materialize, the multiple would contract — even with flat earnings, price would fall.
When it's used
P/E is the first number many investors check to judge whether a stock is 'cheap' or 'expensive' relative to its earnings. It's most useful when comparing companies in the same industry (two banks, two retailers), where business dynamics are similar. Comparing Tesla's P/E to Coca-Cola's, by contrast, says little — the two have radically different growth trajectories and risk profiles.
Limits
P/E is a backward-looking number: it uses trailing earnings, not future ones. Companies that just reported losses have negative or undefined P/E, and the ratio loses meaning. For high-growth names analysts often prefer forward P/E (based on 12-month earnings estimates) or multiples like EV/Sales. A high P/E doesn't automatically mean 'overvalued' either: Amazon traded above P/E 100 for years, and the market was right.
Frequently asked
What's a 'good' P/E ratio?
There's no absolute number. A P/E of 15 can be high for a traditional bank and low for a growing software company. The right approach is to compare against the stock's own history, direct competitors, and sector median.
What does a negative P/E mean?
It means the company reported losses over the last twelve months. The P/E is uninformative in that case, and analysts switch to other multiples (Price/Sales, EV/EBITDA).
Trailing P/E or forward P/E — which one?
Trailing P/E uses confirmed earnings (already published). Forward P/E uses analyst estimates. The first is more reliable, the second more forward-looking. Most analysts watch both.
Related terms
Educational definition. Not financial advice.