What is P/E Ratio?

The P/E ratio (Price-to-Earnings) is a simple way to measure how expensive or cheap a stock is relative to its earnings. It tells you how much investors are willing to pay for each dollar a company earns.

How to Calculate P/E Ratio

Real-World Example

Let’s say you’re analyzing two companies:

📌 Company A (Tech Startup):

• Stock Price = $100

• Earnings per Share (EPS) = $5

• P/E Ratio = 100 ÷ 5 = 20

This means investors are paying $20 for every $1 of earnings. A P/E of 20 is reasonable for a growing company, but if other tech startups have a P/E of 30-40, Company A might be undervalued.

📌 Company B (Established Utility Company):

• Stock Price = $50

• Earnings per Share (EPS) = $10

• P/E Ratio = 50 ÷ 10 = 5

A P/E of 5 is quite low, which might mean the stock is undervalued. But it could also suggest slower growth or concerns about the company’s future.

Why is P/E Ratio Important?

• A high P/E suggests investors expect high growth, but it could also mean the stock is overvalued.

• A low P/E may indicate an undervalued stock or a company with low growth expectations.

Quick Tip:

Remember, a "good" P/E ratio varies by industry. As of January 24, 2025, the median P/E for the S&P 500 was 15.04. Use this as a benchmark, but always compare within the same sector for more accurate insights.