what is the price to earnings p e ratio 
the price to earnings p e ratio measures a company s share price relative to its earnings per share eps often called the price or earnings multiple the p e ratio helps assess the relative value of a company s stock it s handy for comparing a company s valuation against its historical performance against other firms within its industry or the overall market investopedia xiaojie liuunderstanding the p e ratiothe p e ratio is one of the most widely used by investors and analysts reviewing a stock s relative valuation it helps to determine whether a stock is overvalued or undervalued a company s p e can also be benchmarked against other stocks in the same industry or against the broader market such as the s p 500 index analysts interested in long term valuation trends can look at the p e 10 or p e 30 measures which average the past 10 or 30 years of earnings these measures are often used when trying to gauge the overall value of a stock index such as the s p 500 because these longer term metrics can show overall changes through several business cycles the p e ratio of the s p 500 going back to 1927 has had a low of roughly 6 in mid 1949 and been as high as 122 in mid 2009 right after the financial crisis as of april 2024 the s p 500 s p e ratio was 26 26 1p e ratio formula and calculationthe formula and calculation are as follows p e ratio market value per share earnings per share text p e ratio frac text market value per share text earnings per share p e ratio earnings per sharemarket value per share to determine the p e value divide the stock price by the eps the stock price p can be found simply by searching a stock s ticker on a reputable financial website although this concrete value reflects what investors currently pay for the stock the eps is related to earnings reported at different times eps is generally given in two ways trailing 12 months ttm represents the company s performance over the past 12 months another is found in earnings releases which often provide eps guidance this is the company s advice on what it expects in future earnings these different versions of eps form the basis of trailing and forward p e respectively analysts and investors review a company s p e ratio to determine if the share price accurately represents the projected earnings per share forward price to earningsthe most commonly used p e ratios are the forward p e and the trailing p e a third and less typical variation uses the sum of the last two actual quarters and the estimates of the following two quarters the forward or leading p e uses future earnings guidance rather than trailing figures sometimes called estimated price to earnings this forward looking indicator helps compare current earnings to future earnings and can clarify what earnings will look like without changes and other accounting adjustments however there are problems with the forward p e metric namely companies could underestimate earnings to beat the estimated p e when the next quarter s earnings arrive furthermore external analysts may also provide estimates that diverge from the company estimates creating confusion trailing price to earningsthe trailing p e relies on past performance by dividing the current share price by the total eps for the previous 12 months it s the most popular p e metric because it s thought to be objective assuming the company reported earnings accurately but the trailing p e also has its share of shortcomings including that a company s past performance doesn t necessarily determine future earnings investors often base their purchases on potential earnings not historical performance using the trailing p e ratio can be a problem because it relies on a fixed earnings per share eps figure while stock prices are constantly changing this means that if something significant affects a company s stock price either positively or negatively the trailing p e ratio won t accurately reflect it in essence it might not provide an up to date picture of the company s valuation or potential the trailing p e ratio will change as the price of a company s stock moves because earnings are released only each quarter while stocks trade whenever the market is open as a result some investors prefer the forward p e if the forward p e ratio is lower than the trailing p e ratio analysts are expecting earnings to increase if the forward p e is higher than the current p e ratio analysts expect them to decline valuation from p ein addition to indicating whether a company s stock price is overvalued or undervalued the p e ratio can reveal how a stock s value compares with its industry or a benchmark like the s p 500 the p e ratio indicates the dollar amount an investor can expect to invest in a company to receive 1 of that company s earnings hence it s sometimes called the price multiple because it shows how much investors are willing to pay per dollar of earnings if a company trades at a p e multiple of 20x investors are paying 20 for 1 of current earnings the p e ratio also helps investors determine a stock s market value compared with the company s earnings that is the p e ratio shows what the market is willing to pay today for a stock based on its past or future earnings a high p e ratio could signal that a stock s price is high relative to earnings and is overvalued conversely a low p e could indicate that the stock price is low relative to earnings examples of the p e ratiolet s clarify this with an example looking at fedex corporation fdx we can calculate the p e ratio for fdx as of feb 9 2024 when the company s stock price closed at 242 62 the company s earnings per share eps for the trailing 12 months was 16 85 2therefore fdx s p e ratio was as follows let s now look at two energy companies to see their relative values hess corporation hes had the following data at the close of feb 9 2024 we ll use the diluted eps to account for what would occur should all convertible securities be exercised hes thus traded at about 31 times trailing earnings however the p e of 31 isn t helpful unless you have something to compare it with like the stock s industry group a benchmark index or hes s historical p e range hes s p e ratio was higher than the s p 500 which as of feb 9 2024 was about 22 times 12 month trailing earnings 4 to compare hes s p e ratio to a peer let s look at marathon petroleum corporation mpc 