Price-to-Earnings (P/E) Ratio
The P/E ratio measures how much investors pay per dollar of company earnings:
P/E = Stock Price / Earnings Per Share (EPS)
A P/E of 20 means investors pay $20 for every $1 of annual earnings.
Trailing vs Forward P/E
Trailing P/E uses the last 12 months of actual, reported EPS. It's backward-looking but based on real numbers.
Forward P/E uses next 12 months analyst EPS estimates. More relevant for valuing growing companies — it prices in expectations rather than history.
When forward P/E < trailing P/E, the market expects earnings growth. When forward P/E > trailing P/E, earnings are expected to shrink.
Historical P/E Benchmarks
| Period / Condition | Average P/E |
|---|---|
| S&P 500 long-run average | 15–17× |
| Post-2010 (low-rate era) | 20–25× |
| Recession troughs | 10–12× |
| Dot-com bubble peak | 40–50×+ |
P/E Limitations
- Cyclical companies: P/E is misleading at earnings peaks; use normalized earnings
- Negative EPS: P/E is undefined for loss-making companies
- Different industries: Software companies naturally trade at higher P/E than utilities
- Accounting choices: Earnings can be manipulated; cash flow multiples are more robust
Use the P/E Ratio Calculator to compute both trailing and forward P/E.