What is P/E Ratio?

P/E ratio (Price-to-Earnings) tells you how much investors are paying for each dollar of a company's profit. If a stock trades at $100 and earns $5 per share, the P/E is 20. Translation: investors are paying 20x last year's earnings. High P/E = expensive or high growth expectations. Low P/E = cheap or no one believes in the company.

There's no universal 'good' P/E — it depends on the industry, growth rate, and market conditions. Historically, the S&P 500 averages around 15–20x. Tech stocks often trade at 30–50x+ because investors are paying for future growth. A P/E below 10 might look cheap — or it might be a value trap. Context is everything.

Trailing P/E uses the last 12 months of actual earnings. Forward P/E uses analyst estimates for the next 12 months. Forward P/E is more speculative but more relevant for valuation — you're buying the future, not the past. Just remember: analyst estimates are educated guesses dressed up in spreadsheets.

Yes — when a company has negative earnings (i.e., is losing money). A negative P/E is usually shown as N/A or not meaningful. Many growth companies like early Amazon or Tesla operated at losses for years. The bet was that future profits would justify the price. Sometimes that bet pays off. Sometimes you just lose money slowly.

Not necessarily. A high P/E means investors expect strong future earnings growth. Paying 50x earnings for a company growing 40% per year might be perfectly reasonable. Paying 50x for a company growing at 5% is likely a mistake you'll remember. The P/E ratio is just one tool — Larry recommends not using any one tool in isolation.