What Is a P/E 30 Ratio?
A P/E ratio of 30 means that a company's stock price is trading at 30 times the company's earnings per share. The P/E ratio (price-to-earnings ratio) is the valuation ratio of a company's market value per share divided by a company's earnings per share (EPS).
At the most basic level, a P/E ratio identifies for one dollar of earnings what investors are willing to pay for one unit of stock. For instance, a business said to be trading at a P/E ratio of 30:1 would indicate investors are willing to pay $30 in market price for every $1 in earnings. As a relative value indicator, investors can get a sense of which securities are trading (or priced) richly relative to other businesses that may offer a better bargain for the same level of risk.
P/E 30 Ratio Explained
A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth. Once a company becomes more mature, it will grow more slowly and the P/E tends to decline.
In financial circles, the P/E ratio is often a hot topic, with analyst and market prognosticators opining on market trends and whether P/E ratios are higher or lower than historical norms. Although the measure still enjoys a fair amount of attention, insiders know it can be gamed. As such, a number of extensions and alternative metrics have grown in importance. The digitization of companies and markets further complicates traditional interpretations of the ratio.
Understanding the P/E Ratio
Investors often want to compare how the share price of one company compares to that of another. But just looking at the stock price is like comparing apples to oranges since companies have different numbers of shares outstanding, and even if they had the same share float, companies operate in different industry segments or are at different stages in the corporate life cycle. Fortunately, financial analysts have developed a number of tools for such purposes of comparison. The price-to-earnings ratio, or P/E, is one of the most widely used metrics.
FAQs
What Is a P/E 30 Ratio? A P/E ratio of 30 means that a company's stock price is trading at 30 times the company's earnings per share. The P/E ratio (price-to-earnings ratio) is the valuation ratio of a company's market value per share divided by a company's earnings per share (EPS).
How is PE ratio calculated with example? ›
P/E Ratio is calculated by dividing the market price of a share by the earnings per share. For instance, the market price of a share of the Company ABC is Rs 90 and the earnings per share are Rs 9 . P/E = 90 / 9 = 10.
How do you solve PE ratio? ›
The P/E for a stock is computed by dividing the price of a stock (the "P") by the company's annual earnings per share (the "E"). If a stock is trading at $20 per share and its earnings per share are $1, then the stock has a P/E of 20 ($20/$1).
What is an example of a good PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
What does PE ratio tell you? ›
What is PE Ratio? Price to Earnings Ratio or Price to Earnings Multiple is the ratio of share price of a stock to its earnings per share (EPS). PE ratio is one of the most popular valuation metric of stocks. It provides indication whether a stock at its current market price is expensive or cheap.
What is the PE ratio in simple terms? ›
The price-to-earnings (P/E) ratio is the proportion of a company's share price to its earnings per share. A high P/E ratio could mean that a company's stock is overvalued or that investors expect high growth rates.
What is an example of a ratio? ›
A ratio is an ordered pair of numbers a and b, written a / b where b does not equal 0. A proportion is an equation in which two ratios are set equal to each other. For example, if there is 1 boy and 3 girls you could write the ratio as: 1 : 3 (for every one boy there are 3 girls)
How do you know if a stock is overvalued? ›
A high P/E ratio may indicate overvaluation, as it suggests that investors are willing to pay a premium for each dollar of earnings generated. Comparing a company's P/E ratio to its historical average or industry peers can provide insights into whether the stock is trading at a higher valuation.
What is the formula for ratio? ›
Ratio Formula
The general form of representing a ratio of between two quantities say 'a' and 'b' is a: b, which is read as 'a is to b'. The fraction form that represents this ratio is a/b. To further simplify a ratio, we follow the same procedure that we use for simplifying a fraction. a:b = a/b.
What does a PE ratio of 4.5 mean? ›
A Sensex PB ratio of more than 4.5 means the market is overvalued. A Sensex PB ratio between 2.75 to 3.25 means the market is fairly priced. A Sensex PB ratio below 3 means the market is undervalued.
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range.
Is a PE ratio of 5 good? ›
Very low vs very high PE ratios
It is arguable that a PE of five or less is not a remarkable bargain. While it might look as if the company's prospects are being viewed too negatively, it is not a bad rule of thumb to filter out companies with a PE below this level.
Is a PE ratio of 40 good or bad? ›
A high PE ratio, above 40, indicates investors willing to buy a stock at 40 times or more its earnings. Whether investing at a high PE ratio is good or bad depends on various factors.
What if PE ratio is more than 30? ›
It is a way to compare how expensive a stock is relative to its earnings. A higher P/E ratio means that the stock is more expensive relative to its earnings. No. A 30 P/E ratio only means that it would take 30 years for earnings per share to cover the cost of buying it, if there was no inflation and company growth.
Is 31 a good PE ratio? ›
A “good” P/E ratio isn't necessarily a high ratio or a low ratio on its own. The market average P/E ratio currently ranges from 20-25, so a higher PE above that could be considered bad, while a lower PE ratio could be considered better.
What does it mean if the PE ratio is over 35? ›
A higher P/E ratio shows that investors are willing to pay a higher share price now due to growth expectations in the future. The median P/E for the S&P 500 was 14.93 as of May 2023. 1. Investors not only use the P/E ratio to determine a stock's market value but also in determining future earnings growth.
Is a PE ratio of 32 good or bad? ›
The price-to-earnings ratio (P/E ratio) is a quick way to gauge whether a stock is undervalued or overvalued. All else equal, the lower the P/E ratio, the better the investment. For this reason, a P/E of less than 20x is “good” and anything higher than 30x is “bad.”
