Learn Finance P/E Ratio

Investing basics

The P/E ratio

One question, asked about every stock on earth: how much am I paying for $1 of profit?

1 formula 5 rungs 36 years of data ~5 min

The whole formula

Price ÷ earnings per share

Drag either number. Watch what the ratio is actually telling you.

Stock price

$200

Profit per share

$10

P/E

20

You are paying $20 for every $1 of yearly profit.

Roughly where a steady, healthy business trades.

Drag below zero to see what happens to a company that loses money.

Same profit, different price

One dot = one dollar you pay for a dollar of profit

Company A

10×
Price
$100
Profit/share
$10

Ten dollars buys a dollar of yearly profit.

Company B

30×
Price
$300
Profit/share
$10

Three times the price for the same dollar.

B is three times more expensive for the same profit today. That is not automatically wrong — it is a bet that tomorrow's profit is much larger.

Reading the number

Not good or bad — a question to ask

Pick a rung. Arrow keys work too.

Why is this so cheap?

You pay $10 for each $1 of yearly profit. The market expects little growth — or trouble.

Is the discount deserved? Declining industry, heavy debt, a fading moat?

Multiple compression

The stock can fall while the business is fine

A company earning $10 a share at $300 is priced at 30×. Now investors decide it deserves less. Nothing else changes.

Before

$300

30× · $10 earnings

After

$200

20× · $10 earnings

Down 33% — and the company still earns exactly what it did before.

The easiest way to remember it

You are buying a restaurant

Restaurant A

10×
Price
$1,000,000
Profit
$100,000 a year
Growth
Barely growing

Cheaper today. It will still earn about this much in five years.

Restaurant B

30×
Price
$3,000,000
Profit
$100,000 a year
Growth
Profit up 40% a year

Three times the price. At that growth rate it out-earns A within four years.

Paying more for B only makes sense if the growth is real. That is the entire argument behind every expensive stock you have ever seen.

When the number lies

A low P/E built on unusually high earnings

An oil company normally earns $5 a share. Oil spikes, and it earns $15. The stock is $150 either way.

Price

$150

Earnings

$15

P/E

10

Looks cheap

Earnings are three times normal because oil spiked. The low multiple is the boom, not the business.

The whole market

S&P 500 P/E, 1990–2026

Every company in the index, priced against its own profit. The flat line is the long-run average of 16.23×.

Long-run average

16.23×

Today

28.84×

Versus average

1.8×

Shiller CAPE

40.6×

0 15 30 45 60 75 1990 1995 2000 2005 2010 2015 2020 2026 16.23× avg 28.84×

1999 · Dot-com peak

P/E 32.9 the year before the crash

2009 · Earnings collapse

P/E 70.9 — the denominator fell, not a bubble

2021 · Stimulus peak

P/E 36.0, then a fast re-rating down

Trailing reported earnings. The 2009 spike is the classic trap in reverse: earnings collapsed during the financial crisis, so the denominator went tiny. Stocks were not suddenly expensive — the maths broke. Shiller CAPE uses ten years of inflation-adjusted earnings for exactly this reason.

The mental model

Four swaps worth making

High P/E is bad, low P/E is good.

P/E is a price tag on $1 of profit. Ask why the price is what it is.

A falling stock means the business broke.

The multiple can fall on its own. Same profit, lower price.

A low multiple means a bargain.

Check whether the earnings underneath it are unusually high.

A company with no P/E is unmeasurable.

Switch tools: revenue growth, free cash flow, margins.

Learn this next

P/E versus earnings growth

It is the concept that explains how a company at 40× can genuinely be cheaper than one at 15×. Price is only half of the sentence; growth is the other half.

Sources

Educational material only, not investment advice. Figures are annual and change with the market.

More things drawn out

Finance, system design, algorithms and growth — all explained the same way.

More finance guides All learn resources