P/E ratio

The price-to-earnings ratio is the most widely reported valuation multiple in equity research, expressing how much investors are paying today for one dollar of trailing twelve-month earnings. A P/E of 20 says the market values each dollar of last year's profit at twenty dollars; equivalently, it implies a 5% earnings yield. P/E is intuitive but easy to misuse. It is silent on growth, capital intensity, balance-sheet strength, and earnings quality, so two companies with identical P/Es can be priced very differently on a risk-adjusted basis. Cyclical businesses look optically cheap at peak earnings (low P/E, high earnings) and expensive at trough earnings (high P/E, low earnings), which is the inverse of when a value-oriented investor should be interested. P/E is also distorted by one-time charges, tax-rate normalization, share buybacks, and any below-the-line items that flow into GAAP net income. We almost never use trailing P/E as a primary valuation lens. Instead we pair it with forward P/E (analyst consensus for the next twelve months), PEG (P/E divided by integer growth percent), and a peer median to see whether the multiple is anchored, expanding, or compressing relative to the cohort. For high-growth names we lean on forward earnings models discounted at cost of equity; for cyclicals we use mid-cycle P/E on through-cycle earnings; for asset-heavy financials and REITs we substitute price-to-book or price-to-FFO. P/E is a starting question, not an answer.