P/E Ratio (Price-to-Earnings)

The Price-to-Earnings (P/E) ratio is the most widely used stock valuation metric. It tells you how many dollars investors are willing to pay for each dollar of annual earnings. A PE of 20 means investors pay $20 for every $1 of earnings.

• Trailing PE — Uses past 12 months of actual earnings. More reliable, but backward-looking.
• Forward PE — Uses analyst estimates for next 12 months. Forward-looking, but subject to estimate errors.
• PEG Ratio — PE divided by earnings growth rate. PEG < 1.0 = potentially undervalued growth.
• Sector comparison — PE should be compared within sectors. Tech PE of 30 vs Utilities PE of 15 is normal.
• Negative PE — Company is losing money. PE is meaningless; use price-to-sales instead.