P/E Ratio Explained: The One Metric Every Investor Checks

If you’re scrolling through stock charts and seeing “P/E 15” or “P/E 202,” you’re looking at the Price-to-Earnings ratio—basically the fastest way to tell if a stock is cheap or expensive.

What’s P/E Actually Telling You?

The P/E ratio is dead simple: stock price ÷ annual earnings per share. A P/E of 15 means you’re paying $15 for every $1 of annual profit the company makes. That’s it.

It’s one of the holy trinity of metrics (along with EPS and dividend yield) that professionals never skip. Here’s why: it instantly shows you if the market is pricing in growth or if a stock is overcooked.

The Reading Game

• P/E below 10: Looks cheap, but red flag—earnings might be about to crater
• P/E 10-17: The sweet spot analysts love—room to grow without hype
• P/E 17-25: Either the company just crushed it, or you’re catching a bubble
• P/E above 25: Could be justified growth expectations OR pure speculation

Here’s the twist though: sectors totally distort this. Compare apples to apples:

• Arcelor Mittal (steel): P/E 2.58 (industrial sectors are naturally low)
• Zoom Video (tech): P/E 202 (tech always runs hot)

If you’re comparing steel to software by P/E alone, you’ll get wrecked.

The Shiller Twist

Some investors use Cyclically Adjusted P/E (Shiller P/E), which smooths out volatility by using 10-year average earnings instead of just last year’s numbers. More stable picture, but also slower to react.

Why P/E Alone Will Fail You

Here’s the dirty secret: Companies with garbage management and terrible prospects can have low P/E ratios too—the market just doesn’t believe in them. A P/E of 5 isn’t a bargain if the company’s heading for bankruptcy.

You need to combine P/E with:

• ROE (profitability)
• Debt levels
• Free cash flow trends
• Industry fundamentals

The legendary Value investors like Warren Buffett use P/E as a starting filter, not the final word.

The Math (2 Quick Examples)

Example 1: Company worth $2.6B, made $658M in profits

• P/E = 2,600 ÷ 658 = 3.95 (dirt cheap, needs investigation)

Example 2: Stock at $2.78, earnings per share $0.09

• P/E = 2.78 ÷ 0.09 = 30.9 (pricey, why?)

The Real Move

P/E is your first filter—find stocks where it’s low relative to peers in the same sector. Then dig deeper: Is the low P/E because the company’s genuinely undervalued, or because it’s broken? Check the 10-year earnings trend, management quality, competitive moat.

Value investing isn’t just “buy low P/E stocks.” It’s “buy quality companies at discount prices when the market’s sleeping on them.” P/E helps you spot the discount. Everything else confirms whether quality’s actually there.