Lesson 2 of 5 · 4 min read
The P/E ratio explained
Is a stock 'expensive' or 'cheap'? The P/E gives a hint.
What is P/E?
Price-to-Earnings = price divided by earnings per share. How many years of profit are baked into the current price?
High or low?
High P/E (30+) = high growth expectations. Low P/E (<10) can be a bargain — or a warning that there are problems.
Stocky says
A low P/E is not automatically cheap. Sometimes it's low because the market expects profits to collapse — the so-called 'value trap'. Always ask: why is it so low?
Compare within sectors
A tech P/E of 35 is normal; a bank P/E of 35 is expensive. Always compare apples to apples.
Remember this
- P/E = price ÷ earnings per share: how many years of profit you pay for the stock.
- High P/E = high growth expectations; low P/E can be a bargain or a warning.
- A low P/E can be a 'value trap' — always ask why it's low.
- Only compare P/Es within the same sector; normal levels vary widely.
There is a quiz for this lesson
2 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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