P/E ratio, or price-to-earnings ratio, is a quick way to see if a stock is undervalued or overvalued. And so generally speaking, the lower the P/E ratio is, the better it is for both the business and potential investors. The metric is the stock price of a company divided by itsearnings per share. You shouldn’t compare P/E ratios of different kinds of companies, like a tech company and a consumer staple company. In other words, the metric is only useful when comparing apples to apples. If you want help with using P/E ratios to invest your money, consider working with a financial advisor.
P/E Ratio: Why It’s Important
You don’t have to calculate each company’s P/E ratio yourself. After all, you can just Google it. But in case you’re curious, the ratio is the share price divided by earnings per share. The resulting number tells you how much you are paying per dollar that the company earns. Here’s the formula:
Share Price÷ Earnings Per Share = P/E Ratio
For example, a ratio of 15 would mean that investors are willing to pay $15 for every dollar of company earnings. This is why the P/E ratio is sometimes referred to as the “earnings multiple” or just “multiple.”
You generally use the P/E ratio by comparing it to other P/E ratios of companies in the same industry or to past P/E ratios of the same company. If you are comparing same-sector companies, the one with the lower P/E may be undervalued. Or if you’re looking at past data for one company, a higher number could mean it’s no longer a bargain.
How to Tell If a P/E Ratio Is Good or Bad
Ultimately, there’s no hard-and-fast rule for what a good P/E ratio is. But in general, manyvalue investorsconsider a lower P/E ratio better. Again, these ratios are often used in a comparative sense, so what’s good or bad is often dependent on what you’re comparing it against.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
However, the above assumes a value mindset when looking at the market. If you prefer to invest in larger, less volatile company stocks, you may be willing to pay up for a pricier investment with a higher P/E ratio.
The Drawbacks of Using P/E Ratio to Evaluate Investments
The P/E ratio seems like a straightforward calculation, but what you use for earnings can be tricky. For one thing, earnings are reported by each company, and accounting practices are not the same across the board. There’s also the possibility that a company is inflating earnings by devaluing or hiding costs.
That’s partly why it’s a good idea to take the P/E ratio with a grain of salt. Another reason: a company with a high ratio could have high growth prospects. Its ratio is high because it is spending a lot of money to grow its business. So it could still be a good buy.
In other words, you shouldn’t just zero in on the P/E ratiowhen you’re deciding whether to buy shares. There are many other metrics to consider, includingearnings charts, sales figures and other fundamentals of a company.You can also look at the dividend rate if you’re going for dividend investing. Exhaustive research should lead you to more prudent investments. If you don’t have the time, consider hiring a financial advisor.
Best P/E Ratio Stock Examples
The lower the p/e ratio, the better a stock is perceived to be for an investor because the low p/e ratio is great for the business itself. Here are six stocks with low and high p/e ratios from April 2023:
- AcelRx Pharmaceuticals, Inc. (ACRX): -0.25
- ZIM Integrated Shipping Services Ltd. (ZIM): 0.67
- Jackson Financial Inc. (JXN): 7.93
- Globus Maritime Limited (GLBS): 27.11
- Zoetis Inc. (ZTS): 37.00
- The Walt Disney Company (DIS): 73.40
Bottom Line
It’s a good idea for investors to understand the P/E ratio and how to use it to evaluate share prices. But it’s only one of many available metrics. It shouldn’t be used alone, and it shouldn’t be used to compare companies that are in different businesses. That said, it is a handy way of seeing if a stock is a bargain or not. You can use it to find the right investments for your portfolio.
Tips to Become a Better Investor
- Financial advisors often have years of experience managing investments, making them great partners for anyone looking to improve their portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Exchange-traded funds, or ETFs, can be a great way to quickly flesh out your existing portfolio. Like mutual funds, ETFs are baskets of stocks that carry less overall risk than an individual company’s stock does. But unlike mutual funds, you can trade ETFs very easily, buying or selling them very quickly.
- If you’re unsure about how much money an investment could make, SmartAsset’s free investment calculator could help you get an estimate.
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FAQs
Is It Better to Have a Higher or Lower P/E Ratio? Many investors say buying shares in companies with a lower P/E ratio is better because you are paying less for every dollar of earnings. A lower P/E ratio is like a lower price tag, making it attractive to investors looking for a bargain.
Is a high or low P/E ratio better? ›
A higher PE suggests high expectations for future growth, perhaps because the company is small or is an a rapidly expanding market. For others, a low PE is preferred, since it suggests expectations are not too high and the company is more likely to outperform earnings forecasts.
Is 300 a good PE ratio? ›
The price-to-earnings ratio (P/E ratio) is a quick way to gauge whether a stock is undervalued or overvalued. All else equal, the lower the P/E ratio, the better the investment. For this reason, a P/E of less than 20x is “good” and anything higher than 30x is “bad.”
Is a PE ratio of 70 good? ›
A “good” P/E ratio isn't necessarily a high ratio or a low ratio on its own. The market average P/E ratio currently ranges from 20-25, so a higher PE above that could be considered bad, while a lower PE ratio could be considered better.
Is 200 PE ratio good? ›
First, it indicates it's a high growth stock - whose price is not reflective of current earnings or even one year forward earnings. There are people who will say, don't use PE for high growth stocks. This is exactly why. PE of 200, has priced in a lot of growth.
What is a good PE ratio to buy stocks? ›
Average PE of Nifty in the last 20 years was around 20. * So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
What is the PE ratio of Apple? ›
Apple PE ratio as of September 13, 2024 is 33.89.
The price to earnings ratio is calculated by taking the latest closing price and dividing it by the most recent earnings per share (EPS) number. The PE ratio is a simple way to assess whether a stock is over or under valued and is the most widely used valuation measure.
What is a normal PE ratio for a stock? ›
The average market P/E ratio is 20-25 times earnings. Estimated earnings can be used to calculate the projected P/E ratio.
Why is Amazon PE ratio so high? ›
Why is Amazon PE Ratio so high? Amazon's P/E ratio is higher than most companies in the retail industry because investors are optimistic about its future growth potential. As mentioned, a high price multiple can indicate the market expects higher growth from a company.
What is a healthy PE ratio range? ›
What Is Considered to Be a Good PEG Ratio? In general, a good PEG ratio has a value lower than 1.0. PEG ratios greater than 1.0 are generally considered unfavorable, suggesting a stock is overvalued. Meanwhile, PEG ratios lower than 1.0 are considered better, indicating a stock is relatively undervalued.
S&P 500 P/E Ratio is at a current level of 27.45, up from 24.79 last quarter and up from 23.46 one year ago. This is a change of 10.76% from last quarter and 17.03% from one year ago. The S&P 500 PE Ratio is the price to earnings ratio of the constituents of the S&P 500.
Is a PE ratio of 10 low? ›
The P/E ratio is most useful as a relative tool; when one compares the P/E ratio of one company with other, similar companies. Nonetheless, it can also be evaluated on an absolute basis. In this context, analysts generally consider P/E ratios of 10 or lower to be "cheap" and P/E ratios of 20 or higher to be expensive.
What is the PE ratio of a Tesla? ›
As of today (2024-09-12), Tesla's share price is $230.0499. Tesla's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Jun. 2024 was $3.56. Therefore, Tesla's PE Ratio (TTM) for today is 64.62.
What is a comfortable PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
What PE ratio is overvalued? ›
Investors and analysts consider stocks which have a P/E ratio of 50 or above to be an overvalued share, especially in comparison to a stock which has a ratio at par with or below 10. As it allows investors to determine that its share prices are considerably higher than what a company can afford to pay as dividends.
Which stocks are undervalued now? ›
Undervalued stocks
| S.No. | Name | CMP Rs. |
|---|
| 1. | Maha Rashtra Apx | 169.50 |
| 2. | Mishtann Foods | 14.75 |
| 3. | Vipul Ltd | 35.16 |
| 4. | Visco Trade | 88.62 |
8 more rowsBenchmark for Determining Value– The PE ratio is a great tool for comparing a stock's worth to the index as a whole. For example, company P's PE ratio is 19 compared to the average PE ratio of 14 for the past 20 years. Compared to the historical average, a PE ratio of 14 may be deemed undervalued today.
Is 80 PE ratio good? ›
This metrics is used by the investors to determine how a company is performing compared to its peers or the industry itself. For instance, if the relative P/E ratio of a counter is 80%, when compared to the benchmark P/E levels, it means that the company's absolute ratio is lower than the industry.
Is a low PB ratio good? ›
In general, a P/B ratio below one indicates that a company is undervalued, while a ratio above one indicates that the company's stock is trading at a premium. However, what this tells you about a company varies between industries. Depending on the sector a company is in, lower or higher P/B ratios may be the norm.
Is 106 P/E ratio good? ›
A high P/E ratio is not necessarily good or bad. It all depends on the company's industry, earnings growth, interest rates, and market sentiment. For example, a company in a rapidly growing industry with strong earnings growth could have a high P/E ratio and still be considered a good investment.
