Price-to-Earnings (P/E) Ratio
Overview
The P/E ratio is the most widely used stock valuation metric, comparing a company's share price to its earnings per share in a single intuitive number. It appears everywhere from financial news to our stock screener, making it essential knowledge for every investor. Learn to use trailing P/E, forward P/E, and the PEG ratio to determine whether a stock is cheap relative to its growth — a core technique in earnings valuation analysis. Check our glossary for quick definitions of EPS, PEG, and other metrics referenced in this guide.
Key Takeaways
- P/E = Share Price / Earnings Per Share (EPS).
- Trailing P/E uses the last 12 months of earnings; forward P/E uses analyst estimates.
- A high P/E can mean overvaluation or high growth expectations.
- The PEG ratio (P/E / earnings growth rate) normalises P/E for growth companies.
Practical Tips
- Compare P/E against the sector average — not the market as a whole.
- A forward P/E below the trailing P/E suggests analysts expect earnings growth.
- Cyclical companies often look cheap on P/E at peak earnings — use P/E with caution for cyclicals.
More Valuation Metrics Guides
Discounted Cash Flow (DCF) Model
The DCF model estimates a company's intrinsic value by projecting future free cash flows and discounting them to present value — it is the gold standard of fundamental valuation used by professional analysts worldwide. Building a reliable DCF requires careful assumptions about growth rates, discount rates, and terminal value, but when done correctly it provides the most rigorous basis for <a href="/market/stocks">stock</a> buy and sell decisions. This technique sits at the heart of <a href="/strategies/fundamental-analysis/value-investing">value investing</a> and pairs naturally with <a href="/compare/ta-vs-fa">fundamental analysis when compared to technical analysis</a>. Use our <a href="/tools/calculators">financial calculators</a> to run sensitivity tables and stress-test your DCF assumptions across bull, base, and bear scenarios.
Price-to-Book (P/B) Ratio
The P/B ratio compares a stock's market value to its book value (net assets), providing a floor valuation that is especially useful for banks, insurance companies, and asset-heavy industries. <a href="/strategies/fundamental-analysis/value-investing">Value investors</a> have long used P/B to identify <a href="/market/stocks">stocks</a> trading below the liquidation value of their assets. This guide explains when a low P/B signals genuine undervaluation versus deteriorating asset quality, and how to adjust book value for intangibles and goodwill. Filter for low P/B opportunities using our <a href="/tools/screener">stock screener</a> and pair the results with profitability metrics for a complete picture.
EV/EBITDA — Enterprise Value Multiple
EV/EBITDA is a capital-structure-neutral valuation metric favoured by professional analysts and private equity firms for comparing companies regardless of their debt levels. Unlike the P/E ratio, EV/EBITDA accounts for debt and cash positions, making it ideal for evaluating <a href="/market/stocks">stocks</a> in capital-intensive industries or during M&A analysis. This guide covers when to use EV/EBITDA, its advantages over P/E, and common pitfalls that can mislead investors — an essential part of <a href="/strategies/fundamental-analysis/earnings-valuation-analysis">earnings valuation analysis</a>. Screen for attractive EV/EBITDA multiples with our <a href="/tools/screener">stock screener</a> and compare candidates against <a href="/market/indices">index</a> benchmarks.