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Price-to-Earnings Ratio
Valuation
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The ratio between share price and earnings per share, showing how much investors pay for each unit of earnings.
Explanation
The price-to-earnings ratio reflects market expectations for future profitability. It can be calculated as share price divided by EPS, or market capitalization divided by net profit. A higher PE often implies stronger growth expectations, but it can also signal overvaluation. PE should be interpreted with industry characteristics, earnings quality, growth durability, and interest-rate conditions.
Formula
PE = share price / EPS = market capitalization / net profit✓ When to Use
- • Compare relative valuation within the same industry
- • Judge whether a stock is near its historical valuation range
- • Assess growth stocks together with PEG
- • Update valuation after new earnings data
✗ Not For
- • Cyclical stocks at peak earnings can show deceptively low PE
- • Loss-making companies cannot use PE meaningfully
- • Companies with highly volatile earnings can produce misleading single-period PE
⚠ Common Mistakes
- ▸ Treating low PE as automatically cheap
- ▸ Comparing PE across unrelated industries
- ▸ Ignoring earnings quality and sustainability
ValuationCore MetricBeginnerCommon Metric