Price-to-Earnings P E Ratio: Definition, Formula, and Examples

To compare Bank of America’s P/E to a peer, we calculate the P/E for JPMorgan Chase & Co. (JPM) as of the end of 2017. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise. Ask a question about your financial situation providing as much detail as possible. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.

Formula for Price-Earnings Ratio

But, as with most, shorthand is limited both in the terms in the ratio and what’s omitted. This means investors are willing to pay ₹4 for every ₹1 of free cash flow that Lemonade Pvt. As a result, a company will have more than one P/E ratio, so investors must be careful to compare the same P/E when evaluating and comparing different stocks.

Find the P/E Ratio to more than 45.000 Stocks.

• Earnings per share (the “E” in the ratio) gives investors an idea of how valuable those shares are.
• Bank of America’s P/E at 19× was slightly higher than the S&P 500, which over time trades at about 15× trailing earnings.
• P/E ratio is also a good indicator to use to help you figure out how over/undervalued a company’s current share price is and based on your own risk profile.
• Low P/E ratios may reflect that investors see limited growth potential.

Investors should utilize tools like the PE ratio calculator to ensure accurate computations and compare them with industry benchmarks. Simply put, if you were to divide the stock price by its earnings and the earnings are negative, the result would be a negative P/E ratio. However, interpreting a negative P/E ratio can be challenging as it typically indicates a company’s financial struggles. While sectoral comparisons provide a deeper insight, they come with challenges. Industries evolve, and the lines between sectors can blur, especially with interdisciplinary companies that operate across multiple sectors. Moreover, external factors like technological advancements, regulatory changes, and global events can influence entire sectors and thus their average P/E ratios.

P/E Ratio vs. Earnings Yield

Understanding P/FCF can help you identify potential investment opportunities and make informed financial decisions. However, it’s important to use this metric alongside other financial ratios and industry analysis for a well-rounded view of a company’s performance. You can use technical analysis concepts such as demand-supply dynamics, moving averages, etc and equip your theory with profound strategies. Referred to by the acronym BEER (bond equity earnings yield ratio), this ratio shows the relationship between bond yields and earnings yields. Some studies suggest that it is a reliable indicator of stock price movements over the short-term. The price-to-earnings ratio can also be calculated using an estimate of a company’s future earnings.

Stocks with high P/E ratios may suggest that investors are expecting higher earnings growth in the future. For example, in February 2024, the Communications Services Select Sector Index had a P/E of 17.60, while it was 29.72 for the Technology Select Sector Index. To get a general idea of whether a particular P/E ratio is high or low, compare it to the average P/E of others in its sector, then other sectors and the market. The last alternative to consider is the enterprise value-to-EBITDA (EV/EBITDA) ratio. It assesses a company’s valuation relative to its earnings before interest, taxes, depreciation, and amortization. The EV/EBITDA ratio is helpful because it accounts for the company’s debt and cash levels, providing a more holistic view of its valuation compared to the P/E ratio.

When evaluating a company’s current stock price against its earnings, it’s crucial to compare its price earnings ratio with the average P/E ratio of its sector. The P/E ratio allows investors to determine whether or not a given stock is potentially profitable enough to be worth buying. You calculate the ratio by dividing the stock price per share by the stock’s earnings per share. To find a company’s price-earnings ratio, divide its current share price by its per-share earnings.

Another way to look at the PE ratio is the earnings payoff length in a steady-state earnings environment. As a quick example, if a company continues to earn $5 per share annually and you need to pay $30 per share, you’d make your money back in earnings in 6 years (and the P/E ratio is currently 6). This typically occurs when a how to calculate net present value npv company reports negative earnings or losses. However, negative P/E ratios are less common and may require additional analysis to understand the underlying reasons. In short, the difference lies in how much of the cash is truly “free” to use, making the P/FCF a more focused tool for evaluating a company’s financial flexibility.

If a company’s P/E is lower than that of its industry average, then this implies that their stock is currently undervalued and offers some potential as an investment. The PEG ratio uses trailing P/E ratio and divides it by a company’s earnings growth over a specified period of time. Forward P/E ratios can be useful for comparing current earnings with future earnings to estimate growth.

Forward P/E ratio refers to a P/E ratio that is derived from projected future earnings. This is why the P/E ratio is also sometimes called the “P/E multiple”. A high P/E ratio for, say, a particular utilities company isn’t necessarily a problem if many other utilities companies in the industry tend to have high P/E ratios. The industry of the company, the state of the overall market, and the investor’s own interpretation can all affect how they evaluate a particular P/E ratio. The P/E ratio is derived by taking the price of a share over its estimated earnings.

The P/E ratio is one of many fundamental financial metrics for evaluating a company. It’s calculated by dividing the current market price of a stock by its earnings per share. It indicates investor expectations, helping to determine if a stock is overvalued or undervalued relative to its earnings. The P/E ratio helps compare companies within the same industry, like an insurance company to an insurance company or telecom to telecom. However, it should be used with other financial measures since it doesn’t account for future growth prospects, debt levels, or industry-specific factors. The PEG ratio measures the relationship between the price/earnings ratio and earnings growth to give investors a complete picture.