What is the P/E ratio?

Updated October 10, 2026 · StockSignalCheck

The price-to-earnings ratio, or P/E, is one of the most common ways to judge whether a stock looks expensive or cheap compared with the profits the company makes. It's a starting point for valuation, not an answer on its own.

How the P/E ratio is calculated

P/E = share price ÷ earnings per share (EPS)

Earnings per share is the company's profit divided by the number of shares. If a stock trades at $50 and the company earned $2.50 per share over the past year, its P/E is 50 ÷ 2.5 = 20. Put another way, investors are paying $20 for every $1 of yearly profit.

Trailing vs forward P/E

Trailing P/E uses actual earnings from the last 12 months. It's based on real results but looks backward.
Forward P/E uses analysts' estimates of earnings for the next 12 months. It looks ahead, but estimates can be wrong.

Always check which one you're looking at, since the two can differ a lot for a fast-changing company.

How to read a P/E

A higher P/E means investors are paying more for each dollar of current profit. That often reflects expectations of faster growth. A lower P/E can mean the stock is out of favour, growing slowly, or facing problems. Neither is automatically good or bad.

The most useful comparisons are:

Against similar companies. Banks, utilities and software companies typically trade at very different P/Es, so compare within an industry.
Against the company's own history. Is it higher or lower than its usual range?
Against its growth rate. Some investors use the PEG ratio, which divides the P/E by the expected earnings growth rate, to account for growth.

The limits of P/E

No profits, no useful P/E. A company that's losing money has negative earnings, so its P/E is usually shown as "N/A".
Earnings can be distorted. One-time gains, write-offs or accounting choices can make a single year's earnings unusually high or low.
Cyclical businesses mislead. For companies like miners or energy producers, profits peak at the top of a cycle, so the P/E can look lowest exactly when the outlook is about to worsen.
It ignores debt and cash. Two companies with the same P/E can have very different balance sheets.
Low isn't the same as cheap. A low P/E can be a "value trap" if earnings are about to fall.

Where P/E fits with StockSignalCheck

StockSignalCheck's scores measure price momentum and volatility only. They don't include P/E or any other valuation measure. Looking at both gives a fuller picture: P/E tells you how the market prices a company's profits, and momentum tells you how the share price has been trending. For more on combining them, see momentum vs value investing.

You can find a company's earnings per share in its quarterly and annual reports. Canadian companies file these on SEDAR+, and US companies on the SEC's EDGAR system.

Keep learning

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This guide is for education only. It isn't personalized financial, investment or tax advice, and nothing here is a recommendation to buy or sell any security. Investing involves risk, including the possible loss of your money.