What is the P/E ratio — and what people get wrong about it

1. What P/E actually measures

A P/E of 20 means the market is paying $20 for every $1 of the company's current earnings. Put another way: if earnings stayed flat, it would take 20 years to earn your money back. So P/E measures the size of expectations, not price itself.

2. Why low P/E doesn't mean cheap

A low P/E is often low for a reason — the market may expect those earnings to shrink. That's the classic value trap. Conversely, a high P/E means the market expects fast growth, and if that expectation misses, the correction is sharp.

P/E isn't an answer — it's a question: why is the market pricing it this way?

3. Only compare within the same industry

Comparing a software company's P/E to a utility's is meaningless — their growth rates and capital structures are entirely different. P/E is only useful against peers in the same sector, and against the company's own history.

4. When there's no P/E at all

A company losing money has no P/E (or a negative one). That can signal trouble, or an early growth stage. In that case look at revenue growth and margin trend instead — TICKR pulls these directly from SEC EDGAR filings.

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