What is P/E ratio?

P/E means Price to Earnings.

P/E = Price per share ÷ Earnings per share (EPS)

It asks: How many years of current earnings am I paying for this stock?

Quick intuition

• Higher P/E → market expects more growth, quality, or durability (or is simply excited)
• Lower P/E → market expects slower growth, higher risk, or a temporary earning peak

Low P/E is not automatically a bargain.

Two common flavors

1. Trailing P/E — based on past earnings
2. Forward P/E — based on estimated future earnings (estimates can be wrong)

Always check which one you are looking at.

When P/E works better

• Stable businesses with somewhat predictable earnings
• Comparing peers in the same sector
• Comparing a company to its own history

When P/E misleads

Situation	Why P/E lies
Cyclical peak profits	Earnings look high → P/E looks “cheap” before the fall
Losses / tiny earnings	P/E can be meaningless or extreme
Heavy accounting noise	EPS quality is weak
Banks & some financials	Often pair with P/B and asset-quality metrics
Hyper-growth early firms	Earnings may not represent the story yet

A beginner workflow

1. Note the P/E
2. Ask: are earnings normal or inflated?
3. Compare with 2–3 peers
4. Compare with the company’s 5–10 year range
5. Confirm with cash flow and balance sheet

One sentence to remember

P/E is a price tag relative to earnings, not a verdict on business quality.

Educational only. Not a buy/sell tip.