What Is a Good P E Ratio? A Beginner’s Guide

The industry P/E ratio for Booking Holdings would include all its major peers and competitors.

  1. Investors should use a variety of financial ratios to assess the value of a stock.
  2. In fact, many investors, strategists and analysts consider a PEG Ratio lower than 1.0 the best.
  3. Aja McClanahan is a personal finance writer who has a story of getting out of over $120,000 in debt.
  4. With a closing price of $18.22, it had a dividend yield of 11.68% and was trading at a P/E of 8.25 (for an earnings yield of 12.12%).

He holds a Juris Doctor (JD) degree from UAlberta Law – but don’t hold that against him. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. As a point of interest, the lowest P/E ratio recorded for the S&P 500 occurred in December of 1917 when it traded for a mere 5.31 times earnings. Since EPS goes in the denominator of the P/E ratio, it is possible to calculate a negative value. If a company reports either no earnings for a period, or reports a loss, then its EPS will be represented by a negative number.


For example, let’s say Company A has an EPS of $20 and its stock currently trades at $80 a share. Using the P/E ratio, we know ABC is trading at a multiple of 2.5x, and XYZ is trading at a multiple of 10x. For example, if stock ABC is worth $50 per share and stock XYZ is worth $10, which one is cheaper? Unlike competitors, WSZ allows interactive brokers you to check the average P/E ratio when researching a specific company, so you have some context beyond just the ratio related to the company at hand. Similarly, a stock with a high P/E isn’t necessarily an investment that should be avoided. Nate is a serial entrepreneur, part-time investor, and founder of WallStreetZen.

The P/E ratio of the S&P 500 has fluctuated from a low of around 5x (in 1917) to over 120x (in 2009 right before the financial crisis). The long-term average P/E for the S&P 500 is around 16x, meaning that the stocks that make up the index collectively command a premium 16 times greater than their weighted average earnings. Some biotechnology companies, for example, may be working on a new drug that will become a huge hit and very valuable in the near future. But for now, that company may have little or no revenue and high expenses. Earnings per share and the company’s overall P/E ratio may go negative briefly.

What is a High PE Ratio?

The price-to-earnings ratio or P/E is one of the most widely used stock analysis tools by which investors and analysts determine stock valuation. In addition to showing whether a company’s stock price is overvalued or undervalued, the P/E can reveal how a stock’s valuation compares to its industry group or a benchmark like the S&P 500 Index. The P/E ratio measures how cheaply valued a company’s stock price is by comparing the current stock price to its earnings-per-share (EPS).

When is a Low PE Ratio Bad?

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. It suggests that the future outlook is quite bleak, and that there are far too many problems facing management. PE ratios change over time, and, like trend following in technical analysis, a company may have periods when it is overvalued and undervalued by the market. For example, a PE of 15 for a house building company means little unless an investor finds that the average PE for the house building sector is 27.

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Industries such as technology tend to trade with high P/E ratios because many are expected to achieve above average growth rates due to the promise of innovation, and new technology quickly replacing the old. When you buy a stock with a lower P/E ratio, expectations around future growth tend to be lower, and so it’s easier for a company not to disappoint those expectations and cause big stock sell-offs. It’s important to incorporate a company’s balance sheet into your analysis.

What is the P/E ratio of an index like the S&P 500?

Where the P/E ratio is calculated by dividing the price of a stock by its earnings, the earnings yield is calculated by dividing the earnings of a stock by a stock’s current price. If a company’s stock is trading at $100 per share, for example, and the company generates $4 per share in annual earnings, the P/E ratio of the company’s stock would be 25 (100 / 4). To put it another way, given the company’s current earnings, it would take 25 years of accumulated earnings to equal the cost of the investment. In other words, you shouldn’t just zero in on the P/E ratio when you’re deciding whether to buy shares. There are many other metrics to consider, including earnings charts, sales figures and other fundamentals of a company. You can also look at the dividend rate if you’re going for dividend investing.

There’s no universal “good” P/E ratio as it varies by industry and market conditions. Generally, a company with a P/E ratio lower than its industry average could be considered undervalued, and vice versa. The market is approaching a high valuation historically, up there with the 1929 great depression and the Dotcom bust.

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The P/E ratio is a useful tool in valuation analysis as it helps us compare the relative valuation of a company and tells us the market’s expectations of future growth of a stock. However, the P/E ratio alone does not tell us whether a stock is over or undervalued. An investor must perform a discounted cash flow or some type of intrinsic value analysis to get an estimate of what the company is worth to determine if the company is over/undervalued. Just because a company is trading for a higher P/E relative to its peer group and own history does not necessarily mean it’s overvalued, if that price is justified. The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation.

Limitations to the P/E Ratio

Some industries may have a very high average PE Ratio and some a very low PE Ratio, depending on where the industry is in its lifecycle. Most recently, she co-founded a luxury boat sharing club in Kelowna B.C. Rebecca graduated from the University of Saskatchewan with a bachelor’s degree in Economics and since has completed CFA level I and II. In prior years, Rebecca gained valuable experience working as an analyst for the Bank of Canada, the federal energy regulator and in investment management.

The trailing P/E ratio will change as the price of a company’s stock moves because earnings are only released each quarter, while stocks trade day in and day out. If the forward P/E ratio is lower than the trailing P/E ratio, it means analysts are expecting earnings to increase; if the forward P/E is higher than the current P/E ratio, analysts expect them to decrease. The forward (or leading) P/E uses future earnings guidance rather than trailing figures. The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS).

If you are stuck on what multiple and growth rates to use, I highly recommend checking out Aswath Damodaran as he publishes these data sets on his website. In general, a higher P/E ratio suggests that investors are expecting higher earnings growth in the future. A sector is a general segment of the economy that contains similar industries. Sectors are made up of industry groups, and industry groups are made up of stocks with similar businesses such as banking or financial services.

Price to earnings ratio, otherwise also known as the ‘earnings multiple’ or the ‘price multiple’ is a valuation ratio that helps determine the relative valuation of company stock. It considers the current stock price and compares it to the company’s earnings per share (EPS). The earnings per share are actually the company’s https://forex-review.net/ estimated earnings on every share. This is either reinvested back into the company or distributed among the shareholders as dividends. EPS is a direct indication of the company’s stock performance in the market. A “good” P/E ratio is subjective and can vary depending on the industry and the growth prospects.

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