P/E is a metric that every investor should know.

P/E is one of the most discussed tools in the stock market. What lies behind this abbreviation and why is it so important for stock valuation?

The essence of the P/E ratio is a simple way to understand the fairness of the price.

When you look at a stock, the natural question that arises is: is it worth its money? Here, the price-to-earnings ratio helps. It shows the relationship between the market value of the stock and how much the company actually earns.

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

To calculate earnings per share, take the company's net profit (after taxes and preferred stock dividends) and divide it by the average number of common shares outstanding during the period.

In simpler terms, P/E is the answer to the question: how many rubles ( or dollars ) are investors willing to pay for each ruble of profit?

What are the types of this indicator

Analysts work with several variants of P/E, and each reveals its side of reality:

The current indicator is based on the profit for the past 12 months. This fact, confirmed by the financial statements, is the most reliable option.

Forecast indicator looks to the future, using analysts' estimates of revenues for the upcoming year. There is a higher risk of error here, but potential growth can be seen.

Absolute calculation is simply the current stock price divided by the last EPS, without any comparisons. It is useful for initial assessment.

Relative analysis compares a company's ratio with competitors in the industry or with historical values of the same company. It helps to understand whether the stock is overvalued relative to others.

How to Properly Interpret Numbers

A high P/E can mean two opposite things:

1. The market believes in the future growth of the company and is willing to pay more for each dollar of current profit.
2. The stock is simply overvalued, and a correction is inevitable.

A low P/E is also ambiguous — it can either be an undervalued gem or the company is being “picked on” for real problems.

What is considered “high” or “low”? It depends on the industry. Young tech companies with high growth potential have ratios in the range of 30-50. Stable utility services maintain figures between 10-15. Comparing a tech company to a utility based on this criterion means coming to an incorrect conclusion from the outset.

The main advantages of P/E are quick assessment and comparison

Investors appreciate this indicator for the speed of analysis. Within a few seconds, one can get an initial idea of the attractiveness of a stock.

Asset Screening: The P/E ratio filters out obvious “overvaluations” and highlights potentially undervalued securities.

Historical Analytics: if the company's current ratio is higher than its average over the last 5 years, this is a signal. Either the market is predicting a surge, or it's time to consider market saturation.

Sector comparisons: looking at a company's P/E in the context of the industry is a standard way to find the best investment option.

Where this tool fails

P/E is not the holy grail of analysis. The metric has serious limitations:

The ratio simply does not work if the profit is negative (the company is at a loss). The ratio becomes meaningless.

The growth rate remains hidden. Two companies with the same P/E can grow in completely different ways. One can grow rapidly, while the other can remain stagnant.

Companies sometimes play with reporting methodology, “improving” profit figures in the eyes of the public. This is manipulation, but it is possible.

A lot of important things remain out of focus: the level of debt, cash flow movements, asset quality. Relying solely on P/E means going in blind.

Professionals always complement analysis with other metrics: EV/EBITDA, debt ratio, ROE, profitability rates.

Why Different Industries Have Different Indicators

The technology sector is a leader in P/E ratios. Investors are willing to pay a premium for the potential of exponential growth. Rarely does a tech giant trade below a P/E of 20-25.

Utilities ( electricity, water, gas ) — the opposite pole. These companies earn steadily but do not grow. Their ratios usually do not exceed 12-15.

The financial sector occupies a middle position with its 10-18, depending on the economic cycle.

Trying to compare companies from different industries based on this single indicator is a guaranteed way to make a mistake.

Is this applicable to cryptocurrencies and Bitcoin

Here is a simple answer: P/E is not for most cryptocurrencies.

Bitcoin, Ethereum, and the overwhelming majority of altcoins do not publish financial reports and do not have “profits” in the classical sense. They are assets, not companies. Calculating P/E for them means simply multiplying invented numbers.

However, in the decentralized finance sector (DeFi), the situation is somewhat different. Protocols like Uniswap or Aave do indeed generate revenue in the form of fees. Some analysts are trying to apply a similar logic: they assess the value of the protocol relative to its fee income. This is an experimental approach that has not yet gained widespread recognition, but it shows how financial concepts are adapting to the crypto ecosystem.

Conclusion: P/E is a useful starting point, but not the finish.

The P/E ratio is one of the most important tools in an investor's arsenal. It quickly shows whether the market is valuing a company fairly. But this is just the beginning of the analysis.

A comprehensive investment decision requires an analysis of revenue, net profit, debt load, management quality, and industry prospects. P/E is a first-level filter, not the final word on the issue of stock value.