Price to Earnings Ratio - ("P/E Ratio") (2024)

FAQs

What is a good price earnings 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.

A company can be considered to have a high P/E ratio if its P/E is higher than the stock market's current P/E, or even if its P/E is higher than the historical average of 15-17. But, this higher P/E ratio can be justified if a company does grow at above average rates to the rest of the market.

There is no hard and fast rule to determine whether a P/E ratio is “good” or “bad”. A high P/E ratio could mean that a company's stock is overvalued, or that investors are expecting high earnings growth rates in the future.

The P/E ratio is one of many fundamental financial metrics for evaluating a company. It's calculated by dividing the current market price of a stock by its earnings per share. It indicates investor expectations, helping to determine if a stock is overvalued or undervalued relative to its earnings.

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.”

An 80 P/E stock would have a return on equity of only 1.25% (which is very low) if earnings were held constant. The market might expect low earnings for a little while, but is expecting earnings to rise in the future.

A P/E ratio of 200 is high. But it is basically saying that people expect the company to grow earnings to be 15 to 20 times as large as they are now (so the P/E ratio would be 10 to 15). If you don't think that the company has that kind of potential, don't invest.

P/E 30 Ratio Explained

A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth. Once a company becomes more mature, it will grow more slowly and the P/E tends to decline.

Although eight is a lower P/E, and thus technically a more attractive valuation, it's also likely that this company is facing financial difficulties leading to the lower EPS and the low $2 stock price. Conversely, a high P/E ratio could mean a company's stock price is overvalued.

PE ratio = Price/Earnings

If a company has a high P/E ratio, investors are willing to pay a significant price for each rupee of profit the company makes. For example, if XYZ stock has a P/E ratio of 100, it means that investors are willing to pay Rs. 100 for every Rs.

What does a PE ratio of 120 mean? ›

The price-to-earnings ratio is:‍ 120/6 = 20. ‍ This means that an investor is willing to pay 20 times the amount of Company A's earnings to own a share—or said another way, an investor is willing to pay $20 to own a claim on a dollar of the company's earnings.

Very low vs very high PE ratios

It is arguable that a PE of five or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level.

As at Apr 22, 2024, the AAPL stock has a PE ratio of 25.67. This is based on the current EPS of $6.46 and the stock price of $165.84 per share. A decrease of 13% has been seen in the P/E ratio compared to the average of 29.5 of the last 4 quarters.

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.

The P/E for a stock is computed by dividing the price of a stock (the "P") by the company's annual earnings per share (the "E"). If a stock is trading at $20 per share and its earnings per share are $1, then the stock has a P/E of 20 ($20/$1).

Very low vs very high PE ratios

It is arguable that a PE of five or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level.

A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth. Once a company becomes more mature, it will grow more slowly and the P/E tends to decline.

A high PE ratio, above 40, indicates investors willing to buy a stock at 40 times or more its earnings. Whether investing at a high PE ratio is good or bad depends on various factors.