Price-to-earnings ratio (P/E)

The price-to-earnings ratio (P/E) is a stock's current share price divided by its earnings per share. Equivalently, it is market capitalization divided by net income. It tells you how many dollars investors are paying for one dollar of annual earnings.

How it works

• Trailing P/E uses EPS from the last four reported quarters (trailing twelve months).
• Forward P/E uses the consensus estimate for the next twelve months or next fiscal year.
• GAAP vs adjusted: P/E can be calculated on GAAP or adjusted EPS, which can give very different answers.

When earnings are negative, P/E is not meaningful and is usually shown as "N/A." Very small positive earnings produce enormous P/Es that say little.

The inverse, EPS divided by price, is the earnings yield.

Why it matters for traders

P/E is the most widely quoted valuation shortcut. A high P/E usually means the market expects strong growth; a low P/E can mean the business is cheap, cyclical, or facing problems. It is best used relative to:

• The company's own history.
• Peers in the same industry (P/Es vary widely by sector).
• The company's growth rate.

Earnings reports and guidance changes shift forward EPS, which can make a stock look cheaper or pricier overnight even if the price does not move. Cyclical companies often look cheapest on P/E right at peak earnings.

Example

Harbor Freightline (ticker HRBF) trades at $30. Trailing twelve-month EPS is $1.50, so trailing P/E is 30 / 1.50 = 20. Analysts expect $2.00 EPS next year, so forward P/E is 30 / 2.00 = 15. If the stock rises to $36 with no change in estimates, forward P/E becomes 18.

FAQ

What is a good P/E ratio?

There is no universal number. Compare with peers, the company's growth rate and its own history.

What is the difference between trailing and forward P/E?

Trailing P/E uses the past twelve months of reported EPS; forward P/E uses analysts' estimates for future earnings.