By Antonios Fotakis | July 2026
A note before you read: The P/E ratio is probably the most quoted number in investing – and one of the most misunderstood. People use it to call stocks “cheap” or “expensive” without really knowing what they’re comparing. This article fixes that.
What is the P/E ratio. Let me ask you something.
Imagine two coffee shops on the same street. Both make €50,000 in profit per year. One is for sale at €150,000. The other is for sale at €500,000.
Which one is cheaper?
The obvious answer is the first one. But the real answer is: it depends. Maybe the second coffee shop is in a better location and is expected to double its profit in two years. Maybe the first one is struggling, and its profit is about to collapse.
The price alone tells you nothing. The profit alone tells you nothing. The relationship between the two – that’s where the information lives.
That relationship has a name. It’s called the Price-to-Earnings ratio. And it’s the foundation of how investors think about whether a stock is expensive, cheap, or something in between.
So What Is the P/E Ratio, Exactly?
The P/E ratio – short for Price-to-Earnings ratio – is the relationship between a company’s share price and its earnings per share.
The formula is simple: P/E Ratio = Share Price ÷ Earnings Per Share (EPS)
If a company’s shares trade at €100 and it earns €5 per share annually, its P/E ratio is 20. That means investors are paying €20 for every €1 of current earnings.
Think of it this way: the P/E ratio tells you how many years of current earnings it would take to “pay back” the price of the share – assuming those earnings stayed exactly the same forever.
A P/E of 20 means 20 years. A P/E of 10 means 10 years. A P/E of 50 means 50 years.
The P/E ratio is not a verdict. It’s a question – and the question is: is what I’m paying justified by what this company earns and is expected to earn?
High P/E vs Low P/E – What Does It Actually Mean?
This is where most beginners make the first mistake: assuming low P/E always means cheap, and high P/E always means expensive.
It’s more nuanced than that.
A high P/E means investors are willing to pay a premium for each euro of current earnings. Usually because they expect those earnings to grow significantly in the future. A company growing revenue at 40% per year might trade at a P/E of 60 or 80 – not because investors are irrational, but because they’re not paying for today’s earnings. They’re paying for what those earnings will look like in five years.
A low P/E means investors are paying relatively little for each euro of current earnings. This can mean the stock is genuinely undervalued – overlooked by the market, temporarily out of favour, or in a sector that doesn’t attract attention. But it can also mean the market knows something you don’t: that the earnings are about to decline, that the business model is deteriorating, or that the company carries risks that aren’t immediately visible in the numbers.
| P/E Level | Possible Interpretation |
|---|---|
| Below 10 | Potentially undervalued — or a business in trouble |
| 10–20 | Moderate — typical for stable, mature companies |
| 20–40 | Growth expectations priced in — common in tech and consumer sectors |
| Above 40 | High growth expected — or significant speculative premium |
| Negative | Company is currently loss-making |
No P/E number is inherently good or bad. Context is everything.
The Two Types of P/E You’ll See on a Screener
When you open a stock screener and look at the P/E column, you’ll often see two different versions – and the difference between them matters.
Trailing P/E (TTM – Trailing Twelve Months): Calculated using the actual earnings from the past 12 months. This is historical data – it tells you what the company earned, not what it’s expected to earn. More reliable, because it’s based on real numbers. Less forward-looking, because past earnings don’t always predict future ones.
Forward P/E: Calculated using analysts’ estimates of earnings for the next 12 months. More forward-looking, which makes it more relevant for growth companies. Less reliable, because it depends on estimates that may or may not prove accurate.
A company might have a trailing P/E of 35 – which looks expensive – but a forward P/E of 18, because analysts expect earnings to roughly double next year. Understanding which one you’re looking at changes the entire picture.
What’s a “Normal” P/E Ratio?
The honest answer: it depends on three things – the sector, the market environment, and what you’re comparing against.
Historically, the average P/E of the S&P 500 has ranged between 15 and 25 over long periods. That gives you a rough baseline for large US companies. But averages are exactly that – averages. Individual sectors can look very different.
Technology companies tend to trade at higher P/Es because investors price in future growth aggressively. A P/E of 30 – 50 in tech is not unusual even for fundamentally sound businesses.
Utility companies and banks tend to trade at lower P/Es because their growth is slower and more predictable. A P/E of 10 – 15 is common and not a red flag.
REITs often have misleading P/Es because of how depreciation affects their reported earnings – they’re typically evaluated using a different metric (FFO – Funds From Operations) rather than standard EPS. If you’ve read our article on REITs, you’ll know exactly why their income structure is different.
The most useful comparison is always within the same sector – comparing a company’s P/E to its direct competitors, and to its own historical average.
Want to understand how to combine P/E with other metrics when evaluating a real stock? Get the complete Stocks Explained guide here.
The Trap That Catches Most Beginners
Here’s the scenario that plays out constantly among new investors.
They open a screener. They filter for low P/E stocks – anything under 10. They see a list of companies trading at what looks like extraordinary value. They buy. And then they discover why those P/Es were low.
This is called a value trap – a stock that looks cheap on a P/E basis but is cheap for a reason that the number alone doesn’t reveal. The earnings are about to fall. The company has serious debt. The industry is in structural decline. The management is unreliable.
The P/E ratio captured none of that. It just showed you a number.
A low P/E is a question, not an answer. The question is: why is the market only willing to pay this much for these earnings?
Sometimes the answer is “the market is wrong, and this is a genuine opportunity.” More often, the answer is “the market knows something you haven’t figured out yet.”
This is why the screener is always the beginning of research, never the end of it. We covered this in detail in the stock screener article – but it’s worth repeating here, because the P/E ratio is where this lesson gets learned most painfully.
How P/E Fits Into Our Three Categories
The P/E ratio shows up differently depending on which AF Core Global philosophy you’re building with.
In Fortress, we’re primarily working with broad ETFs and index funds – which have their own aggregate P/E that reflects the valuation of the entire index. When the market-wide P/E is historically elevated, we note it – not as a reason to stop investing, but as a reason to manage expectations about near-term returns.
In Cash Flow, P/E is one filter among several when evaluating dividend stocks. A company with a sustainable, growing dividend and a reasonable P/E is more attractive than one with a high yield and an extreme valuation – because extreme valuations can compress quickly when sentiment changes.
In High Voltage, P/E is often less useful on its own – many of our picks are growth companies where the forward P/E and the revenue growth rate tell a more complete story than trailing earnings. Here, we tend to use P/E alongside other metrics rather than in isolation.
One number never tells the whole story. But understanding what it does tell you – and what it doesn’t – makes every other piece of analysis sharper.
Not blind trust. Informed choice.
What to Do With This
The next time you see a P/E ratio on a screener or in a financial article, run through three quick questions before drawing any conclusions:
Is this trailing or forward P/E? Historical earnings or analyst estimates?
What’s the sector average? Is this company more or less expensive than its peers?
Why might this P/E be what it is? What is the market seeing – or missing – that explains this number?
Those three questions won’t give you all the answers. But they’ll stop you from making the mistake of treating a number as a conclusion before you’ve asked what it means.
In the next articles in this series, we’ll go through the other key screener metrics – Market Cap, Dividend Yield, Payout Ratio, and Beta – and give you the same treatment: what they mean, what they don’t, and how to use them without getting misled.
For a complete breakdown of how to read a company’s financials and evaluate a stock from the ground up, our Stocks Explained guide covers everything you need. 👉 Get the Stocks Explained Guide Here
Nothing in this article constitutes financial advice. All content is for informational and educational purposes only. Always do your own research before making any investment decision.
