What is a PE Ratio?
It’s one of the most common valuation metrics.
The price-to-earnings (P/E) ratio relates a company’s share price to its earnings per share.
A high P/E ratio could mean that a company’s stock is overvalued, or else that investors are expecting high growth rates in the future.
Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
How to calculate?
Price (price of stock or market cap) / Earnings per share (net income ttm / outstanding shares)
When to use it?
As you can see, PE ratio only shows data for a year (TTM). It doesn’t give you the full picture. It’s a great way to compare businesses in the same industry and how they performed in the year.
The other way to use PE is to compare it against the S&P standard. The standard S&P PE has been 15. Considering risk factors, analysts usually consider 20 to be a good PE ratio. If your business has a PE below 20, it is good.
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