What is a good P/E ratio for a stock?

A "good" P/E ratio is subjective and depends heavily on the industry, the company's growth prospects, and the overall market conditions. Generally, a P/E ratio lower than its industry average or historical average might indicate undervaluation, while a higher P/E suggests strong growth expectations. For example, a P/E of 15 might be good for a mature utility, but a P/E of 30 could be good for a fast-growing tech company.

How does the P/E ratio differ from the PEG ratio?

The P/E ratio compares a company's share price to its earnings per share, indicating how much investors pay for each dollar of earnings. The PEG ratio takes the P/E ratio and divides it by the company's expected earnings growth rate, providing context for the P/E based on growth potential. The PEG ratio helps determine if a high P/E is justified by high growth.

Can a company have a negative P/E ratio?

Yes, a company can have a negative P/E ratio if its earnings per share (EPS) are negative, meaning the company reported a loss over the past 12 months. A negative P/E ratio is generally not meaningful for valuation and indicates that the company is not currently profitable. In such cases, other metrics like Price-to-Sales (P/S) are often used.

Why do some industries have higher P/E ratios than others?

Industries with higher growth potential, such as technology or biotechnology, typically have higher P/E ratios because investors expect their earnings to grow significantly in the future. Conversely, mature, slow-growth industries like utilities or manufacturing often have lower P/E ratios due to more stable but less dynamic earnings prospects.

Is a low P/E ratio always a sign of an undervalued stock?

Not necessarily. While a low P/E ratio can indicate an undervalued stock, it can also signal that investors have low expectations for the company's future growth, or that the company faces significant risks or challenges. It's crucial to investigate the reasons behind a low P/E and consider other financial and qualitative factors.

How do interest rates affect the P/E ratio?

Higher interest rates generally lead to lower P/E ratios. This is because higher rates increase the cost of borrowing for companies and make future earnings less valuable when discounted back to the present. Conversely, lower interest rates tend to support higher P/E ratios, as future earnings are discounted at a lower rate, making them more attractive.

What is the average P/E ratio for the S&P 500?

The average P/E ratio for the S&P 500 fluctuates. Historically, the long-term average trailing P/E has been around 15-17. However, as of April 2026, the S&P 500's trailing P/E has been in the range of 22-24, reflecting a period of strong market performance and investor optimism. It's important to look at both trailing and forward P/E for the index.

P/E Ratio: Complete Investing Guide | One Percent Finance