P/E Ratio Explained: What It Really Tells You About Stock Value

When you look at a stock quote, the P/E ratio, the price-to-earnings ratio, compares a company’s stock price to its earnings per share. Also known as the earnings multiple, it’s one of the most basic tools to guess if a stock is cheap or expensive—but it’s not a finish line, just a starting point. A high P/E doesn’t always mean a stock is overpriced. It could mean investors expect big growth ahead. A low P/E might signal trouble, or it could mean the market is ignoring a hidden gem.

The P/E ratio ties directly to earnings per share, how much profit a company makes per share of stock. If a company earns $5 per share and trades at $50, its P/E is 10. That means you’d pay $10 for every $1 of profit it makes. But here’s the catch: earnings can be manipulated, one-time events can skew them, and some companies don’t earn anything at all—so the P/E becomes useless. That’s why smart investors pair it with other numbers like dividend stocks, companies that pay out profits to shareholders regularly. A low P/E stock that also pays dividends gives you two ways to make money: price growth and cash payments. Meanwhile, a high P/E tech stock might never pay a dividend, so you’re betting entirely on future growth.

Don’t compare P/E ratios across different industries. A utility company with a P/E of 15 is normal. A software company with the same P/E might be a bargain. The market rewards different sectors differently. And remember: a P/E ratio alone won’t tell you if a company is well-run, has debt problems, or is losing customers. It’s just one piece of the puzzle. The posts below show you how to use the P/E ratio with real examples—from spotting value in mature dividend payers to understanding why some growth stocks trade at 50x earnings. You’ll learn what to ignore, what to dig into, and how to avoid the traps that turn simple metrics into costly mistakes.