Price-to-Earnings Ratio

The P/E is the most used and most misused ratio in investing: it is a relative measure that means nothing without a comparison to the company's own history, its peers, and the growth and risk that justify it. A high P/E is not expensive if growth is high and durable, and a low one is not cheap if earnings are about to fall — which is exactly why cyclicals look cheapest at the top of their cycle. The ratio breaks entirely for loss-making companies, since a negative denominator produces a meaningless number. It also inherits every accounting judgement in the earnings figure, so a P/E computed on low-quality earnings is precise nonsense.