What Is the P/E Ratio?
The P/E Ratio (Price-to-Earnings Ratio) is one of the most widely used valuation metrics in the stock market. It tells you how much investors are paying for each dollar of profit a company generates.
Formula:
P/E = Stock Price / Earnings Per Share (EPS)
Where EPS (Earnings Per Share) = Net Profit / Total Outstanding Shares.
Simple Explanation
Imagine you want to buy a coffee shop that earns $100,000 per year. If the owner sells it for $500,000 — you pay $5 for every $1 of profit — the P/E is 5. If the asking price is $1,000,000 — the P/E is 10.
A low P/E means you pay less for each dollar of earnings (potentially "cheap"). A high P/E means you pay more (potentially "expensive," or the market expects earnings to grow significantly in the future).
Real-World Example
Comparing P/E ratios of 3 Vietnamese bank stocks:
| Stock | Price | EPS (TTM) | P/E |
|---|---|---|---|
| VCB | 92,000 VND | 6,400 VND | 14.4x |
| TCB | 28,000 VND | 4,200 VND | 6.7x |
| BID | 48,000 VND | 3,800 VND | 12.6x |
Looking at the table:
- VCB has the highest P/E (14.4x) — the market is willing to pay a premium because VCB is the top bank with stable growth
- TCB has the lowest P/E (6.7x) — it may be undervalued, or the market has concerns about its growth outlook
Note: These figures are illustrative. Always verify with the latest actual data when analyzing.
Two Types of P/E:
- Trailing P/E (TTM): Uses earnings from the last 4 quarters — reflects actual historical performance
- Forward P/E: Uses projected earnings — reflects future expectations
Why It Matters for Investors
Quick valuation comparison. P/E lets you compare "expensive vs cheap" across stocks in the same sector in seconds. A stock priced at $100 is not necessarily more expensive than one at $20 — you need to compare P/E to know.
Spotting opportunities. When a stock's P/E is significantly lower than the sector average without a fundamental reason — that could be an opportunity. Example: if the banking sector average P/E is 10x but TCB is only 6.7x — it is worth researching further.
Avoiding traps. Extremely low P/E (under 3x) can sometimes signal one-time earnings that will not repeat, or a company in serious trouble. Extremely high P/E (over 40x) could be a bubble. Always combine P/E with other metrics like ROE and D/E for a comprehensive assessment.