PricetoEarnings

Price-to-earnings, often abbreviated as P/E or pricetoearnings, is a common stock valuation metric that compares a company’s current share price with its per-share earnings. It is calculated by dividing the market price per share by earnings per share (EPS). There are two main variants: the trailing P/E, based on the most recent twelve months of earnings (TTM), and the forward (or estimated) P/E, based on forecast earnings for the next twelve months or upcoming fiscal year.

Purpose and interpretation: A high P/E suggests higher growth expectations or potential overvaluation, while a low P/E may indicate undervaluation or lower expected growth. P/E should be interpreted in context, as it varies by industry, growth prospects, and capital structure. It is most informative when comparing similar companies within the same industry or tracking a single company over time.

Limitations and considerations: Earnings quality and accounting choices can distort P/E. It is sensitive to cyclical swings, since earnings troughs raise P/E. It does not account for debt levels, cash, or capital expenditures. Stock buybacks can raise EPS and thus P/E without real changes in value. Comparisons across different countries require caution due to different accounting standards and currencies. P/E is best used with complementary metrics such as PEG, price-to-sales, or EV/EBIT.

Practical use: Investors use P/E to gauge valuation relative to growth, to screen for cheap or expensive stocks, and to benchmark peers.