Price-to-Earnings ratio
P/E
What it is
The P/E ratio compares the stock price to the company's earnings per share. Concretely, it tells you how many years of earnings it would take to pay back the price. A P/E of 20 means "I'm buying 20 years of future earnings at today's price".
How to read it
The lower the P/E, the less you're paying for each dollar of earnings. But a very low P/E can also hide trouble — the company may be declining, or the market may anticipate a drop. Conversely, a high P/E suggests investors are paying a premium because they expect strong future growth.
Common reference points
- Undervalued (worth digging into)< 15
- Normal for most sectors15 – 25
- Expensive (growth expected)25 – 40
- Very expensive or hyper-growth> 40
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
The P/E is useless when earnings are negative. It also varies wildly by sector — a P/E of 30 is normal in tech but alarming for a bank. Always compare to the sector, not in absolute terms.
Other measures — Valuation
Educational content. Polaris is not a registered investment adviser and makes no recommendation.