The price-to-earnings ratio divides a company's market capitalization by its trailing twelve-month net income. It tells you how much investors are willing to pay for each dollar of the company's annual earnings. A P/E of 20 means investors are paying $20 for every $1 of annual earnings, or equivalently, the company's earnings yield (the inverse) is 5%.
P/E is the most widely used valuation metric and the starting point for nearly all investment analysis, but it has significant limitations. It does not account for growth (a high P/E may be justified if earnings are growing rapidly), debt levels (two companies with the same P/E but different leverage have different risk profiles), or earnings quality (companies can manage earnings through accounting choices).
P/E is undefined when earnings are negative and can be misleading when earnings are near zero (producing extremely high ratios) or depressed by one-time charges.
P/E Ratio = Market Capitalization / Net Income (TTM)
GeminIQ divides market cap (price × basic shares) by TTM net income from SEC filings.
A: The S&P 500 historical average P/E is roughly 15-18. Growth companies often trade at 25-50x or higher. Value companies and cyclical businesses may trade at 8-15x. A P/E below 10 often indicates market pessimism about future earnings or a cyclical peak. P/E should be compared against industry peers and the company's own historical range, not against an absolute standard.
A: P/E does not account for growth, leverage, or cash on the balance sheet. A company with a P/E of 30 growing earnings at 25% annually is arguably cheaper than a company with a P/E of 15 growing at 3%. P/E also breaks down when earnings are negative or distorted by one-time items.
A: P/E depends on both the share price (which varies by timing) and net income (which can differ by definition). Some platforms use diluted shares, which produces a higher market cap and a higher P/E. GeminIQ uses period-end basic shares and TTM net income from the filing.