Price-to-Earnings Ratio TTM (P/E)

The price-to-earnings ratio is the most widely cited valuation metric in equity analysis. It answers a direct question: how many dollars must an investor pay for one dollar of current earnings?

Trailing P/E uses actual reported earnings from the last four quarters, making it grounded in fact rather than forecast. This distinguishes it from forward P/E, which relies on analyst estimates.

Benjamin Graham considered P/E a starting filter for identifying cheap stocks. A low trailing P/E relative to the market or sector peers can signal undervaluation, but it can also reflect deteriorating fundamentals. P/E works best when combined with quality and growth metrics.

A low P/E suggests the market prices the stock cheaply relative to its current earnings power. Value investors typically look for P/E ratios below the market average (historically around 15-18 for the S&P 500) as initial screens.

A high P/E can mean the market expects strong future earnings growth, or it can signal overvaluation. Cyclical companies often show misleadingly low P/E at peak earnings and high P/E at trough earnings - the opposite of what intuition suggests.

P/E is the inverse of earnings yield. Graham recommended buying stocks with P/E below 15 as part of his defensive investor criteria. Joel Greenblatt's Magic Formula uses earnings yield (EBIT/EV) as the valuation half of its ranking system, which is conceptually similar but capital-structure-neutral.

Technology and high-growth sectors routinely trade at P/E ratios of 25-40 or higher because the market prices in future earnings expansion. Applying a P/E ceiling of 15 to these sectors will screen out nearly every name.

Utilities, banks, and mature industrials tend to trade at P/E ratios of 10-18. For banks specifically, P/E can be distorted by loan loss provisions and mark-to-market adjustments.

Cyclical sectors (energy, materials, autos) require extra caution. A low P/E during a commodity boom often precedes an earnings collapse. Many value investors prefer normalized or mid-cycle P/E for these industries.