priceearnings

Price-earnings ratio, often abbreviated as P/E, is a widely used stock valuation metric that compares a company’s current market price to its per-share earnings. The basic formula is P/E = price per share divided by earnings per share (EPS). Analysts commonly distinguish trailing P/E, which uses earnings over the last twelve months (TTM), from forward or estimated P/E, which uses projected earnings for the next twelve months.

A higher P/E implies that investors expect higher earnings growth or place greater value on future profitability, while a lower P/E may indicate lower growth expectations or higher risk. P/E is most informative when used to compare companies in the same industry and with similar growth and risk profiles, or to assess a stock against its own historical range or against the market. It is less meaningful for firms with negative earnings or for industries with irregular profits.

Limitations: earnings can be affected by accounting choices, one-time items, and non-cash charges; P/E can be distorted by stock buybacks or by capital structure and tax rates. Positive P/E values do not guarantee future returns. It does not reflect debt levels, cash, or off-balance-sheet obligations, and can be influenced by inflation and changing leverage. Therefore P/E should be used alongside other metrics such as the PEG ratio, price-to-book, and cash flow analyses.

Related terms: forward P/E uses consensus estimates; trailing P/E uses TTM earnings. In some markets, P/E is presented with GAAP or non-GAAP earnings, which can affect comparability. Investors may also analyze P/E relative to the market’s average or to historical levels to gauge valuation trends.