P/E ratio

The P/E ratio is the single most cited valuation number because it collapses a complex question — "is this stock expensive?" — into one figure: the price paid per dollar of annual earnings. A P/E of 20 means it takes twenty years of current earnings, at today's level, for the earnings to sum to the price paid.

Two flavours exist. Trailing P/E uses the last four reported quarters of earnings; it's audited and backward-looking. Forward P/E uses analysts' consensus estimates for the next year; it's more relevant to the future but depends on estimates that get revised.

P/E is most useful as a relative measure — versus the same company's history, versus peers in the same sector, versus the market. Cross-sector comparisons are weaker because different business models have structurally different earnings growth and durability.

Negative earnings make P/E undefined. Cyclical companies near a trough often look cheap on P/E precisely because earnings are temporarily depressed — and expensive near a peak for the opposite reason.