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- Term
- Price-to-Earnings (P/E) Ratio
- Author
- Jason Fernando
- Example
- Let's clarify this with an example, looking at FedEx Corporation ( FDX ). We can calculate the P/E ratio for FDX as of Aug. 8, 2025, when the company's stock price closed at $228.05. The company's EPS for the TTM was $16.81. Therefore, FDX's P/E ratio was as follows: $228.05 / $16.81 = 13.57 Let's look at two energy companies to see their relative values. Marathon Petroleum Corporation ( MPC ) had the following data at the close of Aug. 8, 2025. We'll use the diluted EPS to account for what would occur should all convertible securities be exercised: Stock price : $160.84 Diluted 12 months trailing EPS : $6.88 P/E : 23.38 ($160.84 / $6.88) MPC thus traded at about 23 times trailing earnings. However, the P/E of 23 isn't helpful unless you have something to compare it with, such as the stock's industry group, a benchmark index, or MPC's historical P/E range. MPC's P/E ratio was slightly lower than the S&P 500, which was about 24 times 12-month trailing earnings as of Aug. 8, 2025. Let's look at Hess Midstream ( HESM ) to compare MPC's P/E ratio to a peer: Stock price : $41.64 Diluted 12 months trailing EPS : $2.69 P/E : 15.48 ($41.64 / $2.69) When you compare MPC's P/E of 23 to HESM of 15, MPC's stock could appear overvalued relative to the latter, but not the S&P 500. Alternatively, MPC's higher P/E might mean that investors expect much higher earnings growth in the future than HESM. No ratio can tell you everything you need to know about a stock, however. It's wise to use various financial tools before investing to determine whether a stock is fairly valued.
- Article Link
- investopedia.com
- Full Explanation
- 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. How the Price-to-Earnings (P/E) Ratio Works The price-to-earnings (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. 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 . Going back to 1927, the P/E ratio of the S&P 500 has had a low of roughly six in mid-1949 and been as high as 122 in mid-2009, right after the financial crisis. The S&P 500's P/E ratio was 29.25 as of December 2025. P/E Ratio Formula and Calculation The P/E ratio formula and calculation are as follows: Forward P/E The 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. There are problems with the forward P/E metric, however. Companies could underestimate earnings to beat the estimated P/E when the next quarter's earnings arrive. External analysts may also provide estimates that diverge from the company's estimates, creating confusion. Trailing P/E The 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 the fact 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 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. 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, but stocks trade whenever the market is open. Some investors prefer the forward P/E as a result. Analysts expect earnings to increase if the forward P/E ratio is lower than the trailing P/E ratio. They expect them to decline if the forward P/E is higher than the current P/E ratio. Valuation From P/E In 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. It’s sometimes called the price multiple because it shows how much investors are willing to pay per dollar of earnings. Investors are pay
- Short Definition
- 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.
- Last Reviewed or Updated Date
- 2026-04-15
- Key Takeaways
- The price-to-earnings (P/E) ratio is the proportion of a company's share price to its earnings per share (EPS).
- A high P/E ratio could mean that a company's stock is overvalued or that investors expect high growth rates.
- Companies with no earnings or that are losing money don't have a P/E ratio because there's nothing to put in the denominator.
- The two most used P/E ratios are forward and trailing P/E.
- P/E ratios are most valuable when comparing similar companies in the same industry or for a single company over time.
- Related Terms
Related Terms Name Link business cyclesforward P/Etrailing P/Eprice/earnings-to-growth ratio, or PEGleverageprice-to-book (P/B)price-to-sales (P/S)
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Built by Fous from investopedia.com and checked automatically; it last passed a check on Sep 29, 2026. Fous is not affiliated with Investopedia.
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Define term
1 credit per runExplain a finance, business, or investing term using its matching Investopedia dictionary article. Some uncommon terms may not have a dedicated article.
What you provide
| Field | Type | Required | Description |
|---|---|---|---|
Termterm | Text | Required | Finance, business, or investing word or phrase to define, for example EBITDA.Example: P/E ratio |
What you get
| Field | Type | Description |
|---|---|---|
Termterm | Text | Term as titled in the article.Example: Price-to-Earnings (P/E) Ratio |
Authorauthor | Text | Article author, if credited.Example: Jason Fernando |
Exampleexample | Text | Article example, if one is present. |
Article Linkarticle_link | Text | Link to the Investopedia article.Example: https://www.investopedia.com/terms/p/price-earningsratio.asp |
Key Takeawayskey_takeaways | List | Main points from the article. |
Related Termsrelated_terms | List | Up to 10 linked terms from the article. |
Linkrelated_terms[].link | Text | Example: https://www.investopedia.com/terms/b/businesscycle.asp |
Namerelated_terms[].name | Text | Example: business cycles |
Full Explanationfull_explanation | Text | Plain-text article explanation, up to 4000 characters. |
Short Definitionshort_definition | Text | The first one or two sentences of the article’s definition.Example: The price-to-earnings (P/E) ratio measures a company's share price relative to… |
Last Reviewed or Updated Datelast_reviewed_or_updated_date | Text | Last updated date, YYYY-MM-DD, if available.Example: 2026-04-15 |
Example result
For Term: P/E ratio
JSON
{
"term": "Price-to-Earnings (P/E) Ratio",
"author": "Jason Fernando",
"example": "Let's clarify this with an example, looking at FedEx Corporation ( FDX ). We can calculate the P/E ratio for FDX as of Aug. 8, 2025, when the company's stock price closed at $228.05. The company's EPS…",
"article_link": "https://www.investopedia.com/terms/p/price-earningsratio.asp",
"key_takeaways": [
"The price-to-earnings (P/E) ratio is the proportion of a company's share price to its earnings per share (EPS).",
"A high P/E ratio could mean that a company's stock is overvalued or that investors expect high growth rates.",
"Companies with no earnings or that are losing money don't have a P/E ratio because there's nothing to put in the denominator."
],
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"name": "business cycles"
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{
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"name": "trailing P/E"
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"full_explanation": "What Is the Price-to-Earnings (P/E) Ratio?\n\nThe price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS). Often called the price or earnings multiple, th…",
"short_definition": "The price-to-earnings (P/E) ratio measures a company's share price relative to its earnings per share (EPS). Often called the price or earnings multiple, the P/E ratio helps assess the relative value …",
"last_reviewed_or_updated_date": "2026-04-15"
}For developers
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cURL
# First set your key: export FOUS_API_KEY='YOUR_FOUS_API_KEY'
: "${FOUS_API_KEY:?Set FOUS_API_KEY before running this example}"
curl 'https://api.fous.com/v1/query' \
--fail-with-body --silent --show-error --max-time 120 \
-H "Authorization: Bearer $FOUS_API_KEY" \
-H 'Content-Type: application/json' \
--data-raw '{
"api": "@investopedia",
"visibility": "public",
"operation": "define_term",
"version": 1,
"input": {
"term": "P/E ratio"
},
"response": {
"format": "json"
}
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What does a finance or investing term mean?
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