P/E Ratio in English is the abbreviation of Price-to-Earnings Ratio, which represents the ratio of the company's market capitalization to the company's net profit. It can also be calculated using the ratio of the company's stock price to earnings per share. The price-to-earnings ratio is one of the most widely used metrics for stock valuation. The P/E ratio can be understood as the number of years it takes to recover the investment cost. For example, if a company's P/E = 15, it means that its current stock price is 15 times its earnings per share. If based on the current profitability, it will take about 15 years to recover the investment. A high P/E ratio indicates that the company's stock is currently being touted and a large number of investors have purchased the stock; a low P/E ratio indicates that the market is not interested in the company's stock and not many investors currently hold positions. It should be noted that the P/E ratio is not good or bad. The P/E ratio is best used to compare the historical P/E ratio data of company Z, or to compare the P/E ratios of different companies in the same industry, so that it has the value of investment guidance. Here's Charles Schwab's explanation of the P/E ratio: The P/E ratio is an important indicator to guide investment, but it is best used to compare the historical changes in a company's P/E ratio, or to compare the P/E ratios of different companies in the same industry; Basically, stocks that are at historical lows in price-to-earnings ratios will have a higher probability of subsequent rises, and vice versa; The price-to-earnings ratio cannot be used as the only indicator of investment. You need to comprehensively consider multiple indicators such as earnings per share, cash-to-debt ratio, interest coverage ratio, profit margin, etc. to guide investment. Using Futu moomoo, you can easily check the current price-earnings ratio and historical price-earnings ratio of listed companies. Using Apple (AAPL) as an example, let's look at how to calculate the company's P/E ratio. We need to find the company's market capitalization and the company's net profit for the year. It should be noted that the company releases its net profit every quarter and every year. Here, based on Apple’s annual report (Form 10-K) released in September 2023, we query its net profit for one year = $96.995 billions. On July 8, 2024, Apple's closing price was $227.13, and its market value = $3480 billions. So, Apple’s P/E ratio = 3480 billions / 96.995 billions = 36 This means that the investment cost for every $1 earned by the company is $36. In other words, based on the company's current earnings, it will take you 36 years to recoup the investment cost. If you use Apple's market value and net profit in the past ten years, you can draw a trend chart of its price-to-earnings ratio in the past ten years. The second calculation method: P/E Ratio = Stock Price ➗ Earnings per Share Earnings per share, the full name is Earnings Per Share, often abbreviated as EPS, and its calculation formula is as follows: Earnings per share = Net profit of the company ➗ Total number of shares issued The second calculation method is essentially the same as the first. The company's market value divided by the number of shares issued is the stock price, and the company's net profit divided by the number of shares issued is the earnings per share. What does the P/E ratio mean? The higher the P/E ratio, the higher the stock's price relative to its earnings. The lower the P/E ratio, the cheaper the stock can simply be considered. The price-to-earnings ratio is an important tool for valuing individual stocks or a composite stock index, such as the S&P 500. A high P/E ratio may mean that the stock's price is high relative to earnings, potentially overvaluing it. Conversely, a low P/E ratio may indicate that the current share price is low relative to earnings and may be undervalued. When analyzing stock value, in addition to tracking changes in the price-to-earnings ratio of a single stock, you can also judge the value of the stock price by comparing the price-to-earnings ratios of similar companies in the same industry. What are the types of price-to-earnings ratios? When calculating the P/E ratio, the meaning expressed by the P/E ratio will also be different when using the formula market value or net profit for different periods: 1. TTM P/E ratio TTM price-to-earnings ratio, the full English name is Trailing Twelve Month P/E Ratio, which indicates the company's price-to-earnings ratio in the last 12 months.
When calculating the P/E ratio, the company's net profit (denominator) uses the company's total profit over the past 12 months, and the P/E ratio calculated in this way is called the TTM P/E ratio. TTM P/E Ratio = Market Capitalization ➗ Total Profit in the Last 12 Months The TTM P/E ratio uses the company's earnings data for the last 12 months to calculate the P/E ratio. Therefore, it can be used as an objective and accurate value when evaluating the company, rather than a subjective forecast value. Therefore, the TTM P/E ratio is the most popular P/E ratio indicator because it is the most objective. Take Apple as an example. When we calculated the price-to-earnings ratio before, the net profit used came from the annual report released in September 2023, which showed the net profit from September 2022 to September 2023. If we want to calculate the TTM P/E ratio, we need to find the last four quarterly reports and calculate the net profit for the last 12 months. Apple's last four quarterly reports were released in June 2023, September 2023, December 2023, and March 2024. Its net profit list is as follows: Quarterly report release time Net profit (billions) June 2023 $19.881 September 2023 $22.956 December 2023$33.916 March 2024 $23.636 The total net profit for the most recent year is $100.389 On July 8, 2024, Apple’s market capitalization was: $3480 billions So, Apple’s P/E ratio = $3480 billions / $100.389 billions = 35 Currently popular investment tools, such as Interactive Brokers, Futu, moomoo and Robinhood, also provide TTM price-to-earnings ratios. 2. Shiller P/E Ratio Shiller P/E Ratio, also known as "Cyclically Adjusted P/E Ratio" in English, marked as CAPE, is calculated using the company's average earnings over a period of time, also known as cyclically adjusted P/E Ratio. The Shiller P/E ratio was first proposed by Robert Shiller of Yale University and was first used to measure the valuation of the entire stock market. The Shiller P/E Ratio is calculated by dividing a company's current market capitalization by its average net income over the last ten years, adjusted for inflation. Shiller price-to-earnings ratio = company market capitalization / ten-year average of inflation-adjusted net income Taking Apple as an example, the chart below shows Apple's Shiller P/E ratio over the past ten years. As can be seen from the figure, Apple reached its lowest point in the past decade in 2016, and at the end of 2021, its Shiller price-to-earnings ratio reached its maximum value in the past decade. In addition to valuing public companies, the Shiller P/E ratio is also widely used to measure the valuation of the S&P 500 Index. 3. Forward P/E ratio Forward P/E Ratio, in English, is Forward P/E Ratio. The forward P/E ratio uses the company's future operating conditions and predictions of stock prices to calculate the P/E ratio, which is a prediction of the company's future performance. The disadvantage of this method is that any prediction of the future cannot be 100% accurate. What is the best price-to-earnings ratio? The P/E ratio is a ratio. It is difficult to say which P/E ratio is the best. It only comes into play when comparing the P/E ratios of different companies, or the P/E ratios of the same company in different periods. At the same time, the P/E ratio is not suitable for cyclical industries, such as aviation, real estate, finance and other industries. When investors use the P/E ratio to analyze a company's stock price, they often consider multiple different companies in the same field and compare their P/E ratios. For example: Stock A is trading at $30 and Stock B is trading at $20. It seems that Stock A is more expensive, but combining the price-to-earnings ratio can help investors determine which of the two is cheaper from a valuation perspective. Here we are combining earnings per share (EPS) to calculate the price-to-earnings ratios of stock A and stock B. Stock A: Stock Price = $30; EPS=$2; P/E Raito = 15
Stock B: Stock Price = $20; EPS=$1; P/E Raito = 20 If judged based on the P/E Ratio, Stock A may be more suitable to buy because Stock A has a lower P/E ratio and higher earnings per share. Therefore, when investing, you cannot judge the investment value of a stock solely by its price. In addition, it is worth noting that the P/E ratios of different industries will be different. Some industries have higher average P/E ratios, while other industries have lower average P/E ratios. Therefore, cross-industry comparisons of P/E ratios are of little significance. At the same time, the P/E ratio is just one of many valuation indicators and financial analysis tools used to guide investors in making investment decisions. You may also want to consider the following indicators: Price to Book Value Ratio; Price to Sale Ratio; Enterprise Multiple Enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) Price/Earnings-to-Growth Ratio The P/E ratio can also be used to calculate the P/E ratio of U.S. stock indexes, such as the S&P 500 Index, to evaluate the overall stock market. How to use the P/E ratio to guide investment? As for how to judge whether a stock is worth buying based on its price-to-earnings ratio, investors can judge based on the stock's current price-to-earnings ratio compared with its long-term average value. For example, if a company's share price in 2022 is $30 and its past long-term average earnings per share (EPS) is $2, then the stock's long-term average P/E ratio is 15. If the company's stock price is still $30 in 2023, but its earnings per share rise to $2.5 due to the company's sales increase, then the company's current P/E ratio is reduced to 12. So, the current price of this company's stock is cheaper than the long-term price, because its earnings per share have increased, but the company's stock price has remained unchanged, indicating that its price-to-earnings ratio has decreased, and it is time to buy. Another way to judge whether a stock is too expensive or cheap based on the P/E ratio is to compare it with other companies in the same industry. For example, if you want to invest in the stock of a company that produces biscuits, the average P/E ratio of the entire biscuit manufacturing industry is 10. If the P/E ratio of a biscuit manufacturing company is 15, then the company's stock price is expensive. It needs to be emphasized again that the P/E ratio is a value that needs to be compared to reflect its value guidance, and this value will be affected by many factors. A high value does not mean that it is too expensive, and a low value does not mean that it is cheap. What might high or low P/E ratios mean? Listed companies with high price-to-earnings ratios are often regarded as "growth" companies, because their stock prices are often sought after by investors, so the stock prices are often raised very high. It should be noted that if a stock's P/E ratio is significantly higher than the P/E ratio of similar companies in the same industry, or even higher than its own historical P/E ratio, this may mean that the stock is overvalued. A low P/E ratio may indicate that the company's current share price is undervalued, which may be a good signal to buy the stock. However, it should be noted that a stock cannot be judged to be undervalued based solely on the condition of a low price-to-earnings ratio, because the profitability of listed companies may decline, making investors pessimistic about their future earnings. Therefore, when dealing with stocks with low P/E ratios, it is necessary to analyze the company's earnings to further analyze whether its low P/E ratio is a signal that it is worth investing in, or whether it is indeed not a stock that is not worth investing in. How to query historical price-earnings ratio data? You can use tradingview to query the historical P/E ratio of a listed company: For example, let’s search for Apple’s historical price-to-earnings ratio: Step 1: Log in to the tradingview main website, and then enter the stock ticker (code). For example, Apple's ticker is AAPL, then place the mouse on the first one of the drop-down menu and select the blue button [See Overview]. Step 2: On the AAPL information page, click [Financials].
Step 3: Continue to scroll down the page, and you can see the company's price-to-earnings ratio data. What is the difference between P/E ratio and P/E growth rate? PEG, the full name is Price/Earnings-to-Growth, which is the price-to-earnings growth rate, also known as the "dynamic price-to-earnings ratio." P/E growth rate is the ratio of a stock's P/E ratio to its net profit growth rate. Stocks with a P/E growth rate of less than 1 are generally considered undervalued because the company's P/E ratio is low relative to its earnings growth. A P/E growth rate greater than 1 may be considered overvalued because the company's P/E ratio is too high compared to its earnings growth. However, if a company offers a dividend (Dividend), the P/E growth rate may not be applicable as the P/E growth rate does not take this into account. FAQ