What is the P/E ratio?
The P/E ratio equals share price ÷ earnings per share. If a stock trades at $50 and earned $5 per share last year, its P/E is 10—investors are paying $10 for every $1 of annual profit. Since Graham and Dodd (1934), it's been the go-to quick valuation check.
Does a low P/E mean a stock is cheap?
Not necessarily. P/E reflects expected growth and risk. Fast-growing tech companies often trade at 30× or more, while banks and cyclical companies trade lower. A very low P/E can be a value trap if earnings are about to fall. That's why investors compare P/Es within an industry, use forward P/E based on analyst estimates, or check Robert Shiller's CAPE, which averages 10 years of inflation-adjusted earnings (Shiller, 2000).
How P/E relates to P/B and ROE
Mathematically, P/E × ROE = P/B. A company with high return on equity can justify a higher price-to-book ratio at the same P/E. See price-to-book ratio, ROE and financial ratio analysis.
FAQ
- What if a company has no earnings?
- P/E isn't meaningful when earnings are negative, so analysts use price-to-sales or EV/EBITDA instead.
- What's the PEG ratio?
- PEG divides P/E by the expected earnings growth rate; around 1 is often viewed as fairly priced.
Sources reviewed: 2026-10-25
References
- Graham, B., & Dodd, D. L. (1934). Security analysis. McGraw-Hill.
- Shiller, R. J. (2000). Irrational exuberance. Princeton University Press.