Do You Use P/E When Buying Or Selling A Stock?

How to use it in your investment/trading process

This ratio measures a stock’s previous day’s share price compared to its earning per share (EPS). The EPS can be backward looking or forward looking.

If you see P/E (TTM) you are looking at the P/E, Trailing Twelve Months, i.e. past four quarters. The forward P/E calculation uses the projected EPS over the next four quarters.

What does the P/E tell you?

It is supposed to help you decide if the price of the stock is fair, overvalued or undervalued. Generally speaking, a low P/E means the stock is undervalued, while a high P/E indicated the stock is overvalued.

But what is a high vs. low P/E? Everything is relative; therefore, you need to first determine what an average P/E would be for a stock.

How to find an average P/E

Yes, you can simple Google “price earnings s&p 500” to find what the average is for stocks in the s&p 500 — as of Nov 9, 2024 it was 27.87. Looking for the NASDAQ you will find “as of November 2024 (TTM): 35.3”.

However, it would be better to use the industry average and then even pare down to companies with similar characteristics. lists the P/E…