What is P/E Ratio? Explain PE ratio with example

The P/E ratio, or Price-to-Earnings ratio, is a simple way to figure out if a stock's price makes sense compared to how much the company earns. It’s just the stock price divided by the company’s earnings per share (EPS). That’s it.

For example, if a stock costs $50 and the company earns $5 per share, the P/E ratio is 10. It means you’re paying $10 for every $1 the company makes. Pretty straightforward, right?

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What Does the P/E Ratio Mean in Layman’s Terms?

Think of it like this: you’re buying a machine that makes $1 a day. How much would you pay for it? The P/E ratio tells you exactly that for a company.

If the P/E is 10, you’re paying $10 for each $1 the company earns. A higher P/E means you’re paying more for each dollar earned, which usually means people expect the company to grow in the future.

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How Do You Calculate the P/E Ratio?

Here’s how I’ve been looking at real numbers recently:

• Apple ($AAPL): Stock price $229.98, EPS $6.08. P/E = 37.83.
• Microsoft ($MSFT): Stock price $429.03, EPS $11.75. P/E = 36.52.
• Tesla ($TSLA): Stock price $426.50, EPS $3.53. P/E = 121.
• Ford ($F): Stock price $10.18, EPS $0.81. P/E = 12.5.
• NVIDIA ($NVDA): Stock price $137.71, EPS $2.57. P/E = 53.51.

Each one tells you something different. Apple and Microsoft have similar P/E ratios, which makes sense—they’re both big, steady tech companies. Tesla’s P/E is way higher, reflecting its big growth expectations. Ford’s P/E is much lower, which might mean it’s undervalued or just not as exciting to investors.

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What Is a Good P/E Ratio?

What counts as a “good” P/E ratio depends on a few things, like the industry and the company itself.

• A low P/E (under 15) could mean the stock is undervalued or in a slow-growing industry.
• A moderate P/E (15–25) often suggests a balance between price and growth.
• A high P/E (above 25) means the market expects growth—or maybe the stock’s just overhyped.

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Is 40 P/E Good?

A P/E of 40 isn’t automatically good or bad. It depends on what’s driving that number. If the company is growing quickly, 40 might make sense. If growth is slow, it could mean the stock is overpriced.

Take Tesla with its P/E of 121. Investors are betting big on its future growth. Compare that to Ford with a P/E of 12.5—much lower, but Ford’s growth expectations are also much lower.

So, is 40 good? Depends on the story behind the number.

How Do You Interpret P/E Ratio?

I like to think of the P/E ratio as a quick way to check how the market feels about a company.

A high P/E usually means people are optimistic about the future and willing to pay more for the stock. A low P/E might mean it’s undervalued—or it could mean investors don’t see much growth ahead.

Look at these examples:

• Apple ($AAPL): P/E of 37.83. Investors are paying $37.83 for every $1 Apple earns.
• Microsoft ($MSFT): P/E of 36.52. Similar to Apple, reflecting steady growth.
• Tesla ($TSLA): P/E of 121. High, tied to big growth expectations.
• Ford ($F): P/E of 12.5. Low, reflecting slower growth.

The key is comparing the P/E to similar companies and figuring out why it’s high or low. If you're considering growth potential in other sectors, this blog on EOG Resources is worth a look.

When Should You Use the P/E Ratio?

For me, the P/E ratio is like a starting point. It gives me a quick sense of whether a stock is priced reasonably for what it’s earning.

Here’s what I ask myself:

• Why is the P/E high or low?
• Is this stock priced for growth, or is it undervalued for a reason?
• How does the P/E compare to similar companies in the same industry?

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What Are the Limitations of the P/E Ratio?

The P/E ratio isn’t perfect. It doesn’t work for companies with negative earnings—there’s no way to calculate it. And it doesn’t consider debt, growth rates, or industry trends.

It’s just one metric. You need to look at other things like the company’s financials, its competition, and the overall market conditions to get the full picture.

Final Thoughts: Is the P/E Ratio Enough?

The P/E ratio is simple, but it’s not a magic answer. It’s more like a clue. When I see a P/E, I use it to dig deeper. Why is it high? Why is it low? Does it make sense for this company and this industry?

If you’re comparing stocks, the P/E ratio is a great place to start. Just don’t stop there. Pair it with other research to make smarter decisions.