The P/E Ratio: Paying for Earnings
You're paying $28 for every $1 of Apple's annual earnings. Is that a good deal?
That's what the P/E ratio (Price-to-Earnings) tells you. It sounds technical, but once you understand it, you'll use it to spot bargains — and avoid expensive traps — for the rest of your investing life.
What Is the P/E Ratio?
The formula is simple:
P/E = Stock Price ÷ Earnings Per Share (EPS)
Earnings Per Share (EPS) is simply the company's total profit divided by the number of shares outstanding. It tells you how much of the profit belongs to you as a shareholder.
If Apple earns $6 per share and the stock trades at $170, you're paying about 28 times a year's worth of earnings.
Try It Yourself
Punch in any stock's price and EPS to calculate its P/E:
Enter price and EPS above to calculate
P/E interpretation guide
What Does the Number Mean?
There's no universal "right" P/E — context always matters. But here's a general guide:
Note: Always compare P/E within the same sector. Tech stocks historically trade at higher P/Es than utilities or banks.
The key insight: a lower P/E means you're getting more earnings per dollar paid. A P/E of 10 is like buying a business that earns 10% of its price every year. A P/E of 50 means you're paying 50 years' worth of current earnings — betting that earnings will grow dramatically.
See It on Real Stocks
Let's look at two technology giants. Notice how different their P/E ratios can be even within the same sector:
The Sector Context Rule
Here's a critical mistake many new investors make: comparing P/E ratios across different sectors.
A bank with a P/E of 25 is expensive. A tech company with a P/E of 25 might be cheap.
Why? Different industries have structurally different profit margins, growth rates, and capital requirements. Technology companies can reinvest profits to grow exponentially. Utility companies are regulated, grow slowly, and trade at low P/Es as a result.
The Cross-Sector Comparison Trap
Never say "Stock A's P/E is lower than Stock B's, so A is cheaper" without checking they're in the same sector. A food retailer with P/E 12 and a software company with P/E 35 aren't directly comparable.
Today's Top Value Stocks
Here are stocks ShareValue currently rates highly on valuation. Real data, right now:
Stocks scoring high on valuation today — updated daily
View full leaderboard →Check Yourself
1. Apple has a stock price of $170 and earns $6.08 per share annually. What is its P/E ratio (rounded to nearest whole number)?
2. A bank stock has a P/E of 8. A tech startup has a P/E of 60. Which statement is correct?
The Limits of P/E
P/E is powerful but not perfect:
- Negative earnings: If a company is losing money, P/E is meaningless (or negative). Amazon traded at absurd P/Es for years while building its empire — the market was betting on future profits.
- Cyclical distortions: Mining and energy companies have volatile earnings. Their P/E can look "cheap" at the peak of the cycle and "expensive" at the trough.
- Accounting manipulation: EPS can be distorted by one-time items or aggressive accounting. Always look at adjusted or normalized earnings.
Rule of thumb: Use P/E as a starting point, never a conclusion. A low P/E is a reason to investigate further — not to buy immediately.
Apply It Now
Go find real stocks with low P/E ratios and strong ShareValue quality scores — the combination Buffett looks for:
Stocks with strong composite scores — explore their P/E on their full pages
View full leaderboard →Key Takeaways
- P/E = Stock Price ÷ EPS. It tells you how much you pay for each $1 of annual earnings. - Lower P/E generally means cheaper, but context (sector, growth rate, quality) always matters. - A P/E under 15 is usually considered value territory; above 40 requires exceptional growth to justify. - Never compare P/E across different sectors — bank P/Es and tech P/Es are apples and oranges. - The best investments often combine a reasonable P/E with high earnings quality — a low P/E on a deteriorating business is a value trap.