Pro Login
Home » Deep Briefs »  » P/E Ratio: What It Is, How to Calculate It, And When Investors Should Use It

P/E Ratio: What It Is, How to Calculate It, And When Investors Should Use It

Published: Jan 4, 2026 
Disclosure: Briefs Finance is not a broker-dealer or investment adviser. All content is general information and for educational purposes only, not individualized advice or recommendations to buy or sell any security. Investing involves significant risk, including possible loss of principal, and past performance does not guarantee future results. You are solely responsible for your investment decisions and should consult a licensed financial, legal, or tax professional before acting on any information provided.
Summary:

The P/E ratio (price-to-earnings ratio) shows how much investors are paying for every dollar of a company's profit.

It helps you determine if a stock is overvalued or undervalued compared to competitors and industry averages.

Investors can use it with other valuation methods to see if they're getting a good deal on stock, rather than justt looking at price.

Picture this: You’re standing in front of a big board with hundreds of stock tickers.

You see a couple you recognize - maybe Nvidia and AMD.

Nvidia's stock price is $188 and AMD’s $223. You think to yourself, “wow, Nvidia is cheaper, it must be a better buy!”

And while, in this example, Nvidia’s stock price is lower, that doesn’t necessarily mean you’re getting more value for your money.

Professional investors use different valuation methods to actually value what a stock is worth, beyond price.

Because price is what you pay, but value is what you actually get.

So if you've ever wondered whether a stock is fairly priced, overvalued, or a potential bargain, the P/E ratio is where you start.

P/E is a valuation metric that compares a company's stock price to its earnings per share.

It tells you how much investors are willing to pay for each dollar of a company's earnings. 

This single number helps you compare stocks, spot value opportunities, and make smarter investment decisions.

Let’s break down what P/E ratio means, how to calculate it with real examples, and how investors use P/E ratio to value stocks.

Before you go: Our market analysts are using P/E ratio and other valuation metrics to find some of the best hidden potential opportunities on Wall Street today.

These are individual stocks and ETFs you won’t hear talked about anywhere else - if you want insight into these potential investment opportunities, subscribe to Market Briefs Pro.

What P/E Ratio Means

P/E stands for price-to-earnings.

Here's what it tells you: if a company has a P/E ratio of 28, for example, investors are paying $28 for every $1 that company earns in profit.

The formula is straightforward:

P/E Ratio = Stock Price ÷ Earnings Per Share (EPS)

Earnings per share is calculated by dividing the company's net income by its total shares outstanding.

EPS = Net Income ÷ Total Shares Outstanding

Once you have both numbers, you can calculate the P/E ratio and understand what investors think the company is worth.

How to Calculate P/E Ratio (Real Example)

Let's walk through calculating the P/E ratio for Coca-Cola step by step.

Note: All numbers are pulled from Coca-Cola’s 2024 10-K.

Step 1: Find the stock price

Coca-Cola's stock price is around $70 per share. You can find this on any financial website like Yahoo Finance or by searching "Coca-Cola stock" on Google.

Step 2: Find net income

Look at Coca-Cola's income statement in their 10-K filing. The net income is $10.6 billion.

Step 3: Find shares outstanding

From the 10-K, Coca-Cola has about 4.36 billion shares outstanding.

Step 4: Calculate earnings per share

$10.6 billion ÷ 4.36 billion shares = $2.43 per share

Step 5: Calculate P/E ratio

$70 ÷ $2.43 = 28.8

Coca-Cola has a P/E ratio of 28.8. This means investors are willing to pay almost $29 for every $1 that Coca-Cola earns in profit.

What Does a Good P/E Ratio Look Like?

There's no universal "good" P/E ratio. It depends on the industry, the company's growth prospects, and market conditions.

Warren Buffett typically invests in companies with P/E ratios between 15 and 30. 

At those levels, you're paying a reasonable price for earnings. But this isn't a hard rule. 

He's bought companies with P/E ratios above and below this range when the opportunity justified it.

Here's how to interpret P/E ratios:

P/E under 15: Might indicate an undervalued company. Or it could signal serious problems the market is pricing in.

P/E between 15-30: Generally considered reasonable pricing. This is where many value investors look for opportunities.

P/E over 30: Could mean the stock is overvalued. Or investors expect strong future growth that justifies paying a premium.

Comparing P/E Ratios Between Companies

Let's compare Disney and Ford to see how P/E ratios work in context.

Note: These numbers are examples based on data from 2024 and 2025.

Disney:

  • Stock price: $110
  • EPS: $2.75
  • P/E ratio: 40

Ford:

  • Stock price: $13
  • EPS: $1.17
  • P/E ratio: 11

Disney's P/E of 40 is significantly higher than Ford's 11. Does that mean Ford is a better value investment?

Not necessarily. Disney's higher P/E suggests the market expects strong growth from streaming and entertainment. 

Ford's lower P/E reflects that automakers are cyclical businesses affected by economic downturns, with thin profit margins and concerns about electric vehicle transitions.

The lower P/E might represent a value opportunity. Or it might reflect legitimate concerns about Ford's future profitability.

Either way, these numbers should not be viewed in a vacuum. 

Professional investors use multiple valuation metrics to determine value, including valuing a company’s non-financials in addition to its financials.

P/E Ratios Vary By Industry

Tech companies typically have higher P/E ratios than agricultural companies, typically because tech companies have more prospects for growth and higher margins. 

That's why you need to compare companies within the same industry.

Here's what semiconductor P/E ratios looked like at one point in 2025:

  • Nvidia: 60.5
  • AMD: 96.5
  • Taiwan Semiconductor: 30.0
  • Intel: Not profitable (can't calculate P/E)

These numbers are all over the place. That's because the semiconductor industry is rapidly changing, making P/E ratios less useful for comparison in this specific sector.

When P/E Ratio Works Best

The P/E ratio only works for companies with positive earnings. If a company is losing money, you can't calculate a meaningful P/E ratio.

For unprofitable companies, investors use different metrics like the P/S ratio (price-to-sales ratio), which compares stock price to revenue instead of profit.

P/E Ratio Limitations

The P/E ratio is a powerful tool, but it has limits.

It doesn't account for growth rates. A company with a P/E of 50 growing at 50% annually might be a better value than a company with a P/E of 15 growing at 5% annually. 

That's why growth investors use the PEG ratio (price-to-earnings-growth ratio) instead.

It varies by industry. A P/E of 20 might be high for utilities but low for technology companies.

It uses past earnings. The P/E ratio looks backward at what a company already earned, not forward at what it might earn in the future.

How Investors Use P/E Ratios

Value investors like Warren Buffett use P/E ratios in addition to other metrics to find undervalued companies. 

They look for stocks with low P/E ratios compared to their historical averages or industry peers.

Growth investors care less about current P/E ratios. They focus on whether a high P/E is justified by future growth prospects.

The key is understanding what the P/E ratio tells you and what it doesn't. It's one data point in your analysis, not the complete picture.

When you combine P/E ratios with other metrics like the P/B ratio (price-to-book), revenue growth, and competitive positioning, you get a clearer view of whether a stock is fairly valued.

And that’s important to note: Some investors like to use P/E ratio - other investors never use P/E ratio. That’s because this is just one of the simplest ways to begin valuing a company.

But it is not the only way. Our market analysts use dozens of key data points, along with financial and non-financial analysis in order to spot potential stock opportunities on Wall Street.

You can find out what specific opportunities our analysts have spotted this week by subscribing to Market Briefs Pro.

In the end, the P/E ratio is fundamental to stock analysis and one of the most commonly used. 

It helps you understand what the market thinks a company is worth and whether you agree with that valuation.

But it’s just a starting point - professional investors don’t use it in a vacuum, and investors should understand other methods and risks before investing.


Blogs

February 20, 2026
Modine (MOD) Stock: The AI Cooling Play Most Investors Are Missing

Everyone knows AI needs chips. So far, all of the investment dollars have flowed into chip companies like Nvidia as the obvious play. But the market may be overlooking a hidden investment play in AI right now: Heat. Data centers powering AI use a ton of heat - and heat kills computers. Without proper cooling, […]

Read More
February 20, 2026
Public Vs Private Company: What's The Difference?

Why This Matters to You as an Investor Some of the biggest companies you know like Amazon, Apple, Ford, Walmart, and Nike are all public. Why should you care? When you buy a stock, you're buying ownership in a public company. That means if the business does well, your shares could be worth more, which […]

Read More
February 19, 2026
3 Bank & Financial Service Stocks Investors Should Watch This Year

Something quietly changed in 2025. For nearly three years, tech stocks were the only game in town. AI hype, cloud computing, and software growth was the growth some investors were looking for.  Valuations in AI and tech have grown as a result and now, many of these companies are trading at 30 times their earnings, […]

Read More
February 19, 2026
Net Asset Value (NAV): What Every Investor Must Know

What Is Net Asset Value? When you buy a share of an ETF, you're not buying a single company.  You're buying a slice of a basket of investments - stocks, bonds, cash, or other assets - all bundled together inside one fund. Net asset value, or NAV, is how you measure what that slice is […]

Read More
February 18, 2026
Market Cap Formula: What It Is & How It Works

What Is Market Cap? There are a lot of ways that investors assess the value of a company. You can value a company's financials, its non-financials, or even use metrics like P/E ratio. But then there’s the most straightforward way to measure value: Market cap. Market cap - short for market capitalization - is the […]

Read More
February 17, 2026
What Is the S&P 500? A Simple Guide for Investors

You've heard people say "the market is up" or "the market crashed today." But what market are they actually talking about? Most of the time? They're talking about the S&P 500. It's one of the single most important numbers on Wall Street. Investors use it as a benchmark to see how the overall market is […]

Read More
February 16, 2026
Toyota (TM) Stock: Why The Japanese Auto Giant Could Take Over Wall Street

Japan's Corporate Culture Is Flipping Upside Down For decades, Japanese companies prioritized executives and employees over shareholders.  Lifetime employment, loyalty to long-term suppliers, and stable operations mattered more than maximizing profits for investors. What happened? Japanese markets have largely been overshadowed by U.S. markets. But now, corporate culture is changing in Japan and flipping returns […]

Read More
February 16, 2026
Assets Under Management (AUM): What It Means for ETF Investors

What Is AUM? Assets under management, or AUM, is how much money is in a fund. When you're researching an ETF, you need to know the fund's AUM. What you're really asking is: how much money is this fund moving around? This information has to be provided in the prospectus. Every ETF is legally required […]

Read More
February 15, 2026
How to Pay Off Credit Card Debt Fast: A Simple Guide to Financial Freedom

Your credit card company is doing something remarkable. They're earning a 20% annual return on your money, year after year after year.  And you're the one paying for it. The average American household carries $6,200 in credit card debt as of late 2025.  If you invested that same $6,200 at age 21 and never added […]

Read More
February 14, 2026
Small Cap Stocks: The AI Infrastructure Play Hiding in Plain Sight

Everyone knows AI sent chip makers to record highs.  What most people don't know is that behind every data center running AI, there's a massive infrastructure problem that needs solving. In 2024 and 2025, AI sent Nvidia and other chip makers to record highs in a tech boom that Wall Street hasn't experienced in years.  […]

Read More
1 2 3 10
Share via
Copy link