Fundamental metric / Valuation
P/E Ratio
Price you pay per dollar of trailing earnings.
How many dollars of share price the market is willing to pay for one dollar of trailing-twelve-month earnings. The universal valuation anchor for profitable companies — useful for cross-sector comparison and as a quick read on whether the market expects earnings growth, decline, or a quality re-rating. Sensitive to one-off items in the denominator (write-downs, tax holidays, share buybacks); pair with EV/EBITDA when capital structure or non-cash charges look noisy.
i Measure
How many dollars of share price the market is willing to pay for one dollar of trailing-twelve-month earnings. The universal valuation anchor for profitable companies — useful for cross-sector comparison and as a quick read on whether the market expects earnings growth, decline, or a quality re-rating. Sensitive to one-off items in the denominator (write-downs, tax holidays, share buybacks); pair with EV/EBITDA when capital structure or non-cash charges look noisy.
Typical range 5x to 40x
ii Formula
P/E = market_cap / net_income_ttm
market_cap- Total dollar value of all outstanding shares — current share price multiplied by diluted shares outstanding. $
net_income_ttm- Trailing-twelve-month net income. $
iii Interpretation
- When high Market is paying a premium because it expects earnings to grow, margins to expand, or the franchise to deserve a quality re-rating. Verify the growth is in forward estimates and not just a P/E inflated by a temporarily depressed denominator.
- When mid-range Multiple sits in line with the broad market and most large-cap sectors. Look at growth, margins, and FCF conversion to decide whether it's fairly priced or quietly mispriced.
- When low Either a genuine bargain or earnings about to fall. Check FCF margin, cash conversion, and forward EPS estimates before assuming it's a value play — single-digit P/Es most often pair with structural decline or a heavily cyclical business at the top of its earnings cycle.