when distinguishing absolute p e from relative p e remember that absolute p e represents the p e of the current period for example if the stock price today is 100 and the ttm earnings are 2 per share the p e is 50 100 2 
the relative p e compares the absolute p e to a benchmark or a range of past p es over a relevant period such as the past 10 years the relative p e shows what portion or percentage of the past p es that the current p e has reached the relative p e usually compares the current p e value with the highest value of the range investors might also compare the current p e to the bottom side of the range measuring how close the current p e is to the historic low the relative p e will have a value below 100 if the current p e is lower than the past value whether the past is high or low if the relative p e measure is 100 or more this tells investors that the current p e has reached or surpassed the past value limitations of using the p e ratiolike any other fundamental metric the price to earnings ratio comes with a few limitations that are important to understand companies that aren t profitable and have no earnings or negative earnings per share pose a challenge for calculating p e views among analysts vary about how to deal with this some say there is a negative p e others assign a p e of 0 while most just say the p e doesn t exist n a until a company becomes profitable a main limitation of using p e ratios is for comparing the p e ratios of companies from varied sectors companies valuation and growth rates often vary wildly between industries because of how and when the firms earn their money as such one should only use p e as a comparative tool when considering companies in the same sector because this is the only kind that will provide worthwhile results for example comparing the p e ratios of a retail company and the p e of an oil and gas drilling company could suggest one is the superior investment but that s not a cogent conclusion an individual company s high p e ratio for example would be less cause for concern when the entire sector has high p e ratios other p e considerationsbecause a company s debt can affect both share price and earnings leverage can skew p e ratios as well for example suppose two similar companies differ in the debt they hold the firm with more debt will likely have a lower p e value than the one with less debt however if the business is solid the one with more debt could have higher earnings because of the risks it has taken another critical limitation of price to earnings ratios lies within the formula for calculating p e p e ratios rely on accurately presenting the market value of shares and earnings per share estimates the market determines the prices of shares available in many places however the source of earnings information is the company itself thus it s possible it could be manipulated so analysts and investors have to trust the company s officers to provide genuine information the stock will be considered riskier and less valuable if that trust is broken to reduce these risks the p e ratio is only one measurement analyst s review if a company were to manipulate its results intentionally it would be challenging to ensure all the metrics were aligned in how they were changed that s why the p e ratio continues to be a central data point when analyzing public companies though by no means is it the only one alternatives to p e ratioswhile the p e ratio is a commonly used metric you can also use several other alternatives one such alternative is the price to book p b ratio this ratio compares a company s market value to its book value the book value represents the company s net asset value according to its balance sheet the p b ratio is particularly useful for industries with substantial tangible assets and a lower p b ratio may indicate that the stock is undervalued another alternative is the price to sales p s ratio which compares a company s stock price to its revenues this ratio is useful for evaluating companies that may not be profitable yet or are in industries with volatile earnings the p s ratio gives you insight into how much investors are willing to pay per dollar of sales making it particularly relevant for start ups or tech companies with high growth potential but inconsistent earnings the last alternative to consider is the enterprise value to ebitda ev ebitda ratio it assesses a company s valuation relative to its earnings before interest taxes depreciation and amortization the ev ebitda ratio is helpful because it accounts for the company s debt and cash levels providing a more holistic view of its valuation compared to the p e ratio investors often use the ev ebitda ratio to evaluate companies in capital intensive industries such as telecommunications or utilities 