Price per dollar of profit
That is all P/E measures.
All tracks and lessons
The price-to-earnings (P/E) ratio
P/E shows how many dollars investors pay for each dollar of yearly profit. Useful for comparison, never a verdict on its own.
In this lesson you will
- Calculate P/E
- Tell trailing from forward P/E
- Know the ratio’s limits
The P/E ratio divides the share price by earnings per share (EPS). A $60 share with $3 of yearly EPS has a P/E of 20: investors are paying $20 for each $1 of current yearly profit.
What it can tell you
A higher P/E usually means investors expect faster future growth; a lower one can mean lower expectations or more risk. It is most useful when comparing similar companies or a company with its own history.
Trailing and forward
- Trailing P/E uses the last 12 months of actual earnings.
- Forward P/E uses estimated future earnings, which may be wrong.
Limits
P/E does not work when earnings are negative, can be distorted by one-off gains or losses, and differs naturally between industries. A low P/E is not automatically cheap, and a high one is not automatically expensive.
Education only — GetGuac does not recommend individual stocks.
By the GetGuac team · Editorial policy
Three ideas to keep
Compare like with like
Same industry or same company over time.
Forward means forecast
Estimates can be wrong.
Do it in 4 steps
Learn the formula
Price ÷ EPS.
Note trailing or forward
Every time you see one.
Compare within an industry
Not across.
Use alongside other facts
Never alone.
Two made-up companies
Same industry, trailing earnings.
| Company | Price | EPS | P/E |
|---|---|---|---|
| Example A | $60 | $3.00 | 20 |
| Example B | $45 | $1.50 | 30 |
B’s price is lower but investors pay more for each dollar of its profit.
Where this usually goes wrong
- Calling a low P/E cheap without context
- Comparing P/E across unrelated industries
- Treating forward estimates as facts
Calculate the P/E of a made-up $80 share earning $5 per share.
Tools and guides for this lesson
Quick quiz
1. P/E equals…
2. Forward P/E uses…
3. When does P/E not work?
0 of 3 answered
Puzzle
A share trades at $80 with EPS of $5. What is the P/E? What price gives a P/E of 12?
Show the answer
P/E 16; $60
$80 ÷ $5 = 16. $5 × 12 = $60.