What Is a Good P/E Ratio? Is High or Low Better?

P/E ratio, or price-to-earnings ratio, is a quick way to see if a stock is undervalued or overvalued. Generally speaking, the lower the P/E ratio is, the better it is for both the business and potential investors. Analyzing P/E ratio is useful when comparing companies within the same sector.

A financial advisor can help you use P/E ratios to choose the right stocks for your investment portfolio.

How P/E Ratio Is Used to Evaluate Investments

P/E ratio is the share price divided by earnings per share. The resulting number tells you how much you are paying per dollar that the company earns. Here’s the formula:

Share Price ÷ Earnings Per Share = P/E Ratio

For example, a ratio of 15 would mean investors are willing to pay $15 for every dollar of company earnings. This is why the P/E ratio is sometimes called the “earnings multiple” or just “multiple.”

You generally use the P/E ratio by comparing it to other P/E ratios of companies in the same industry or to past P/E ratios of the same company. If you compare same-sector companies, the one with the lower P/E may be undervalued. Or if you’re looking at past data for one company, a higher number could mean it’s no longer a bargain.

What Is a Good P/E Ratio?

Ultimately, there’s no hard-and-fast rule for what a good P/E ratio is. But in general, many value investors consider a lower P/E ratio to be better. Again, these ratios are often used in a comparative sense, so what’s good or bad depends on what you’re comparing it against.

To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. The lower the P/E ratio a company has, the better an investment the metric is saying it is.

However, the above assumes a value mindset when looking at the market. If you prefer to invest in large-cap stocks, you may be willing to pay for a pricier investment with a higher P/E ratio.

Drawbacks of Using the P/E Ratio

The P/E ratio seems straightforward, but what you use for earnings can be tricky. For one thing, earnings are reported by each company, and accounting practices are not the same across the board. Some might use adjusted earnings, while others use earnings before interest, taxes, depreciation and amortization (EBITDA). There’s also the possibility that a company is inflating earnings by devaluing or hiding costs.

That’s partly why it’s a good idea to use other metrics alongside the P/E ratio to evaluate a company. Another reason: a company with a high ratio could have high growth prospects. Its ratio is high because it is spending a lot of money to grow its business. So it could still be a good buy.

In other words, you shouldn’t just zero in on the P/E ratio when you’re deciding whether to buy shares. There are many other metrics to consider, including earnings charts, sales figures and other fundamentals of a company. You can also look at the dividend rate if you’re going for dividend investing. Exhaustive research should lead you to more prudent investments. If you don’t have the time, consider hiring a financial advisor.

P/E Ratio Stock Examples

Drawbacks of the P/E ratio include that it ignores debt, growth and industry differences.

The lower the P/E ratio, the better a stock is perceived to be for an investor because the low P/E ratio is great for the business itself. Here are six stocks with low and high P/E ratios from November 2025:

AcelRx Pharmaceuticals, Inc. (ACRX): -3.52
ZIM Integrated Shipping Services Ltd. (ZIM): 2.45
Jackson Financial Inc. (JXN): 13.56
Globus Maritime Limited (GLBS): -4.75
Zoetis Inc. (ZTS): 21.60
The Walt Disney Company (DIS): 15.25

What Does a Negative P/E Ratio Mean?

Simply that the company reported a net loss rather than a net profit for the previous accounting period. While that’s not ideal, a negative P/E ratio doesn’t necessarily indicate that a company is in trouble.

Negative earnings may be the result of a temporary downturn caused by internal or external forces. The imposition of widespread tariffs, for example, may trigger negative earnings if the company’s costs to import goods rise, which requires an adjustment period, or market sentiment falters.

An extended period of negative P/E ratio reporting, however, could indicate that a company is spending more money than its bringing in. It may foretell more significant consequences if the company later goes on to file for bankruptcy protection.

Forward P/E vs. Trailing P/E: Understanding the Context

Not all P/E ratios are the same. Investors use trailing P/E or forward P/E, and the choice affects how a stock’s value is viewed:

A trailing P/E uses actual earnings from the past 12 months, making it objective and based on reported data. It’s a backward-looking metric, which means it reflects how profitable the company has been, not necessarily how it’s expected to perform going forward.
A forward P/E, by contrast, is based on projected earnings for the next 12 months. These forecasts come from analysts and company guidance, making it a forward-looking measure that reflects future expectations.

If a stock has a high trailing P/E but a low forward P/E, it may suggest that the company’s earnings are expected to grow. If the forward P/E is higher than the trailing P/E, it may signal anticipated earnings declines or overly optimistic stock pricing.

Both versions are useful, but they tell different stories. Trailing P/E is reliable for historical comparisons and peer benchmarking, while forward P/E helps assess whether a stock is priced appropriately based on growth expectations.

Investors may use both together to identify valuation gaps and make better-informed decisions about when to buy or sell investments.

How P/E Fits into a Broader Valuation Strategy

P/E ratio is a helpful starting point for comparing companies, but it works best when combined with other valuation metrics. Investors often pair P/E with measures like price-to-book (P/B), price-to-sales (P/S) and free cash flow to get a fuller picture of how a company is performing. These additional metrics can help identify whether a stock’s P/E reflects strong earnings, temporary results, or accounting choices that affect reported profits.

Growth expectations also matter. Companies with fast-rising revenue or expanding markets may trade at higher P/E levels because investors anticipate stronger earnings ahead. In contrast, companies with slowing growth or shrinking markets may trade at lower P/E levels, even if their current earnings look solid. Looking at growth trends can help explain why similar companies trade at very different multiples.

Debt levels can also influence how useful the P/E ratio is. A company that relies heavily on borrowing may have earnings that look strong in the short term, yet its stock may still be priced cautiously if investors expect interest costs or refinancing risks to affect future profitability. Adding metrics like debt-to-equity or interest coverage can help clarify whether the P/E ratio reflects sustainable earnings.

Using P/E alongside these other measures gives investors a clearer view of whether a stock is fairly priced, undervalued or trading at a premium. This broader approach helps avoid decisions based on a single metric and provides a more complete understanding of a company’s financial strength.

Bottom Line

A good P/E ratio depends on the industry and market.

It’s a good idea for investors to understand the P/E ratio and how to use it to evaluate share prices. But it’s only one of many available metrics. It shouldn’t be used alone, and it shouldn’t be used to compare companies that are in different businesses. That said, it is a handy way of seeing if a stock is a bargain or not. You can use it to find the right investments for your portfolio.

Tips to Become a Better Investor

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