How to calculate the P/E ratio

P/E = share price ÷ earnings per share. EPS is net income divided by the number of shares outstanding, usually measured over the last 12 months. The drawing at the top of the page shows the hypothetical example: a share price of $100 and EPS of $5.00 give a P/E of 20.

You can do the same calculation with totals: market capitalization ÷ net income. Hypothetical Company A has 50 million shares at $100, a market value of $5 billion, and earned $250 million over the last year: $5 billion ÷ $250 million = 20. It is the same answer, because $250 million ÷ 50 million shares = $5.00 per share.

Read it as a price tag on profits: at a P/E of 20, buyers pay $20 for each $1 of yearly earnings. Put another way, if earnings never changed, it would take about 20 years of profits to add up to today’s price. Earnings rarely stay flat, which is why P/Es differ so much from one company to another.

EPS (earnings per share)
Net income ÷ shares outstanding. Companies report basic and diluted EPS; diluted EPS also counts shares that could be created from stock options and convertible securities, so it is the more conservative of the two.
Market capitalization
Share price × shares outstanding: the market value of all the company’s shares. 50 million shares at $100 is $5 billion.

Trailing P/E vs forward P/E

Trailing P/E, often labeled P/E (TTM) for trailing twelve months, uses the EPS actually reported over the last four quarters. Hypothetical Company A reported quarterly EPS of $1.10, $1.20, $1.30 and $1.40: a trailing EPS of $5.00 and, at $100, a trailing P/E of 20.

Forward P/E uses estimated EPS for the next 12 months or the next fiscal year, usually the average of analysts’ forecasts. If analysts expect Company A to earn $6.25, its forward P/E is $100 ÷ $6.25 = 16. A forward P/E below the trailing one means earnings are expected to grow; above it, they are expected to shrink.

The trade-off: trailing P/E rests on real, reported numbers but looks backward; forward P/E looks ahead but rests on estimates that are often wrong, especially for young or cyclical companies. Check which one a website shows before you compare two stocks, and use the same kind for both.

Earnings yield: the P/E turned upside down

The earnings yield is EPS ÷ share price, the inverse of the P/E, written as a percentage. A P/E of 20 is an earnings yield of 1 ÷ 20 = 5%; a P/E of 10 is 10%; a P/E of 40 is 2.5%.

Some investors find it easier to compare with other yields, such as the interest on a government bond. Keep the difference in mind: a bond’s interest is set by contract, while a company’s earnings can rise, fall or disappear, and most of them are not paid out to you as cash. It is a rough yardstick, not a like-for-like comparison.

Is a high P/E ratio bad and a low P/E ratio good?

Not by itself. A P/E compares today’s price with past or near-term earnings, while the market prices the whole future. A high P/E usually means investors expect earnings to grow fast; a low P/E usually means they expect slow growth, a decline or more risk. Whether either is a good deal depends on what actually happens next.

The drawing below shows the cost of ignoring this: earnings rise every year, yet the share price falls because the market stops paying 60 times earnings and settles at 25. Several things move a P/E without making the stock cheap or expensive:

  • Growth: a company growing EPS 30% a year can justify a much higher P/E than one growing 3%. The growth vs value stocks guide compares both styles.
  • Sector: industries differ in growth, risk and how much capital they need, so their typical P/Es differ too. Comparing a software company with a utility tells you little.
  • The cycle: for cyclical companies such as carmakers or steelmakers, the P/E often looks lowest near the peak of the cycle, when earnings are temporarily high, and highest near the bottom.
  • One-off items: a gain from selling a building can inflate EPS for one year. Hypothetical: at $100, reported EPS of $6.00 that includes a $1.00 one-time gain gives a P/E of 16.7; without the gain, EPS is $5.00 and the P/E is 20.
  • Buybacks: a company that buys back its own shares spreads the same profit over fewer shares. Net income flat at $500 million, shares down from 100 million to 95 million: EPS rises from $5.00 to about $5.26 with no growth in the business.
  • Interest rates: when rates are higher, investors often pay lower multiples for the same earnings, and the reverse. The link is loose and does not hold every time.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn lines over the same years Y1 to Y5: EPS rising steadily in green while the share price falls in red, with a P/E 60 tag at the start, a P/E 25 tag at the end and a note reading great company, too high a price.

What if a company has no earnings? Negative P/E

If EPS is zero or negative, the P/E is not meaningful. Hypothetical: a stock at $20 that lost $0.50 per share has a mathematical P/E of −40, which does not make it cheap; it means there are no earnings to put a price on. Most data sites show N/A or NM (not meaningful) instead.

Tiny positive earnings cause the opposite distortion: EPS of $0.10 on a $50 stock is a P/E of 500, which says more about the small denominator than about the business. For young or loss-making companies, investors use other measures, below, or the forward P/E if profits are expected soon. Each has blind spots, and a company without profits is a bet that profits will come; many never arrive. The how to pick growth stocks guide shows P/S used in a valuation check.

P/S ratio (price-to-sales)
Market capitalization ÷ revenue over the last 12 months. Useful when profits are small or negative, but sales are not profits.
EV/EBITDA
Enterprise value (market value plus debt minus cash) ÷ earnings before interest, taxes, depreciation and amortization. It compares companies with different amounts of debt, but EBITDA ignores capital spending.

How to compare P/E ratios: same sector, same company over time

A P/E means most next to other P/Es measured the same way. Two comparisons are useful. First, against direct competitors in the same sector: in the drawing below, four hypothetical companies trade at 12, 18, 25 and 33 times earnings against a sector average of 22. Second, against the company’s own history: a business that usually traded between 15 and 25 times earnings and now trades at 35 is priced for more than usual.

Neither comparison tells you who is right. Company D may deserve its premium because it grows faster, and Company A may be cheap because its sales are shrinking, the value trap described in the Warren Buffett strategy guide. A P/E far from its sector or its own history is a question to investigate, not an answer. The right side of the drawing adds time: Company C’s trailing P/E is 25, but on next year’s estimated earnings it is 20.

Keep the inputs consistent: trailing with trailing, forward with forward, GAAP with GAAP, and the same period. A market-wide average P/E, or a variant like the cyclically adjusted CAPE ratio popularized by economist Robert Shiller, which uses ten years of inflation-adjusted earnings, describes the whole market, not your stock.

Turn your phone sideways to read the drawing. Tap to close.

Hand-drawn horizontal bars for four hypothetical companies in one sector, A 12, B 18, C 25 and D 33, crossed by a dashed sector average line at 22, with a note reading compare like with like; on the right, Company C as two vertical bars, trailing 25 and forward 20, the forward bar dashed, with a note reading forward uses estimates.

P/E vs PEG ratio: adding growth to the picture

The PEG ratio divides the P/E by the expected yearly EPS growth rate, written as a whole number. A P/E of 40 with 40% growth gives a PEG of 1.0; a P/E of 20 with 5% growth gives 4.0, as in the drawing below. Peter Lynch popularized it, writing that a fairly priced company has a P/E about equal to its growth rate, a PEG near 1. See the Peter Lynch strategy and growth investing guides.

PEG fixes one blind spot of the P/E and adds another: the growth rate is a forecast. If Company A’s growth slows from 40% to 20%, the same P/E of 40 becomes a PEG of 2.0. PEG also ignores debt, dividends and the quality of earnings, and says little about cyclicals, turnarounds or companies whose earnings are shrinking. Treat it as a first filter, not a verdict.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn company cards: Company A, P/E 40 and growth 40%, gives PEG 1.0; Company B, P/E 20 and growth 5%, gives PEG 4.0; a note reads PEG = P/E ÷ growth rate.

GAAP vs adjusted EPS: which earnings is the P/E using?

US companies report EPS under GAAP, the official accounting rules, and many also publish an adjusted, or non-GAAP, EPS that leaves out items they consider unusual or non-cash, such as stock-based compensation, restructuring costs or the amortization of acquired intangible assets. Adjusted EPS is usually higher, so a P/E built on it looks lower.

Hypothetical: a stock at $60 reports GAAP EPS of $2.00 and adjusted EPS of $3.00. Its P/E is 30 on GAAP earnings and 20 on adjusted earnings: same company, same day, a 50% difference. Companies must reconcile adjusted figures to GAAP, and the reconciliation table in the earnings release shows what was removed; how to read earnings reports shows where to find it. If the same “one-time” charges appear every year, they are part of the business. A few habits keep the P/E honest:

  • Check which EPS a quote uses: trailing or forward, GAAP or adjusted.
  • Compare like with like across companies and across years.
  • Read the P/E next to growth, margins, debt and free cash flow, never alone.
  • Remember what it is: a ratio between today’s price and one year of earnings, not an estimate of value. Stocks with low P/Es can keep falling, and stocks with high P/Es can keep rising.