What Is the P/E Ratio? How to Tell If a Stock Is Expensive
P/E is the best-known valuation ratio: it shows how many years of a company's earnings you're paying for when you buy its stock. Here's how to calculate it and why a low P/E isn't always a bargain.
The formula
P/E = share price / earnings per share or, which is the same thing, market cap / annual net income.
Example: a company is worth ₽100 billion and earns ₽10 billion a year. P/E = 10. Roughly speaking, if earnings stayed the same, the purchase would pay for itself in 10 years.
How to read it
| P/E | What it may mean |
|---|---|
| Low | The market doesn't expect growth or sees risks |
| Industry average | Valued "like everyone else" |
| High | The market expects strong earnings growth |
| Negative | The company is losing money; P/E doesn't apply |
When P/E is misleading
- Different industries. Fast-growing tech companies usually have a higher P/E than banks or commodity producers. Compare with industry peers.
- One-time earnings. If a company sold an asset, earnings went up and P/E went down, but that won't happen again.
- Cyclical companies. At the peak of the cycle, earnings are at their highest, and P/E looks low right before a downturn.
- Debt. P/E doesn't take the company's debt into account.
P/E is a starting point, not a ready-made answer. Other valuation ratios are covered in the lesson valuation ratios and stock screeners, and a full company breakdown is in the article how to analyze a company.
Aspiro Invest is a medium-term portfolio: what to hold, when to review it, and where the protective levels are.
- P/E = price / earnings per share.
- Compare within an industry, not with the whole market.
- A low P/E isn't always a bargain: check the reason.
Frequently Asked Questions
What P/E is considered normal?
There's no single standard. Look at the industry's average P/E and at the company's own history.
What is forward P/E?
It's P/E calculated using the earnings forecast for next year rather than past earnings. It depends on how accurate analysts' forecasts are.
Can I pick stocks based on P/E alone?
No. You need to look at business growth, debt, dividends, and the quality of earnings. P/E is just a filter for an initial screen.
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