P/E Ratio Explained — Is a Stock Expensive?
The P/E ratio is price divided by earnings. What a P/E of 15 vs 30 implies, why it never tells the whole story, and how to compare within an industry.
What the P/E ratio is
P/E = price ÷ earnings per share. If a stock trades at 300k with EPS of 20k, its P/E is 15. Loosely, that means you are paying 15 years of current earnings for the share — a rough "payback period" if earnings stayed flat.
Reading the number
- Low P/E (under ~10): cheaper on the surface, often an older or slow-growing company — and sometimes a value trap if earnings are declining.
- Moderate P/E (~10–20): reasonable for a company with steady, durable profits.
- High P/E (over ~30): expensive, usually reflecting high growth expectations — risky if that growth slows.
P/E alone is not enough
Compare two companies:
- Company A: P/E 10, but earnings falling 20% a year.
- Company B: P/E 25, but earnings growing 30% a year.
Company B may well be the better business despite the higher P/E. Price without growth context is misleading.
Compare within an industry
A P/E only means something relative to peers. If banks average a P/E of 12, a bank at 10 looks cheaper than the group and one at 15 looks richer. A "high" tech P/E can be normal, while the same number in a slow-growth sector is expensive.
PEG for a fuller picture
PEG = P/E ÷ earnings growth rate. A P/E of 20 with 20% growth gives a PEG of 1.0 (fairly priced); a P/E of 30 with 50% growth gives 0.6 (arguably cheap). As a rough guide, PEG under 1.0 leans cheap, above 1.0 leans expensive.
Common mistakes
- Buying only because the P/E is low — check the earnings trend first.
- Not comparing to the sector.
- Ignoring history — one good year does not make earnings durable.
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