How to Read the P/E Ratio: One Metric to See Through Valuation

-Earnings Ratio (P/E) is a classic metric for measuring stock valuation. The calculation formula is simple:

P/E = Stock Price ÷ Earnings Per Share (EPS)

How to Interpret?

• Low P/E: May indicate the stock is undervalued, or may indicate the market is pessimistic about the company's prospects
• High P/E: May indicate the stock is overvalued, or may indicate the market expects rapid growth

Don't look at the P/E number alone — combine it with industry averages, historical data, and growth prospects for a complete analysis.

Summary

P/E is a useful but imperfect metric. Use it together with other valuation methods to get a more comprehensive view.