What Is a Good P/E Ratio? How to Calculate It and Read It by Sector

Quick answer: There is no single “good” P/E ratio. A P/E only means something next to the right comparison: the company’s sector, its own past P/E, and how fast its earnings are growing. For scale, the S&P 500 traded at 19.0 times its expected earnings for the next 12 months on October 16, 2026, according to FactSet.¹ A bank and a software company can both be fairly priced at very different P/Es.

Table of contents

1. The P/E formula
2. Worked example: Company X vs Company Y
3. What is a good P/E ratio?
4. P/E by sector
5. Trailing vs forward P/E
6. When P/E misleads you
7. Practice in UseFinLit
8. FAQ

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The P/E formula

P/E stands for price-to-earnings. It compares a stock’s price with the profit the company earns for each share.

P/E = Share price / Earnings per share (EPS)
EPS = Net profit / Number of shares

The SEC’s investor education site, Investor.gov, describes it the same way: the current share price divided by earnings per share, where EPS is the last 12 months of earnings divided by shares outstanding.²

Read the result as “dollars paid for $1 of yearly profit.” A P/E of 15 means buyers pay $15 for every $1 the company currently earns per share.

Worked example: Company X vs Company Y

Illustration only. Company X and Company Y are made-up companies.

	Company X	Company Y
Share price	$20	$80
EPS (last 12 months)	$0.80	$8.00
P/E	20 / 0.80 = 25	80 / 8 = 10

At first glance, X looks cheap. It costs $20, and Y costs $80. But the share price alone tells you nothing about value. What matters is how much profit you get for the price.

Put $100 into each:

• $100 buys 5 shares of X. Those shares earn 5 × $0.80 = $4 a year.
• $100 buys 1.25 shares of Y. Those shares earn 1.25 × $8 = $10 a year.

The “cheaper” stock is the pricier one for its profit. You pay $25 for each $1 of X’s earnings and $10 for each $1 of Y’s.

That doesn’t make Y the better buy. X might be growing fast, and Y might be shrinking. The P/E tells you what the market is paying today. It doesn’t tell you why.

What is a good P/E ratio?

No single number works for every stock. Ask three questions instead.

1. How does it compare with its sector? Companies in the same industry share similar risks and growth rates, so their P/Es are comparable. A P/E of 12 can be normal for a large bank and unusual for a software company.

2. How does it compare with its own history? If a company has traded between 15 and 20 times earnings for years and now sits at 30, something changed. Either the market expects faster growth, or the price got ahead of the profits.

3. How fast are earnings growing? A higher P/E can make sense when earnings are expected to rise quickly. The PEG ratio puts this into one number:

PEG = P/E / Expected annual EPS growth (%)

A stock with a P/E of 30 and 30% expected growth has a PEG of 1. One with a P/E of 15 and 5% growth has a PEG of 3. The second has the lower P/E, but you pay more for each point of growth. PEG has a weak spot: it rests on growth forecasts, and forecasts are often wrong.

The whole market also gives you a reference point. On October 16, 2026, FactSet put the S&P 500 forward 12-month P/E at 19.0, just below its 5-year average of 19.8 and its 10-year average of 19.1.¹

P/E by sector

Here is how far apart sectors sit. The data is from NYU Stern professor Aswath Damodaran’s US dataset, dated January 2026.³

US industry (Damodaran)	Trailing P/E, profitable firms (aggregate)	Forward P/E
Banks (money center)	14.17	13.04
Homebuilding	11.25	14.35
Oil/gas (integrated)	19.02	21.90
Utilities (general)	20.48	18.13
Software (system & application)	37.52	34.13
Semiconductors	48.81	37.29
Total US market	26.56	27.66

FactSet’s October 16, 2026 report shows the same pattern at the sector level for the S&P 500. Energy (13.3) and Financials (14.5) had the lowest forward P/Es. Consumer Discretionary (23.4), Industrials (22.6) and Consumer Staples (22.4) had the highest.¹

So compare like with like. Put JPMorgan next to other large banks, and Barclays or Lloyds next to other UK banks. Put Microsoft next to other software companies, not next to an oil major like Shell or BP.

Trailing vs forward P/E

• Trailing P/E uses the last 12 months of reported earnings. It’s based on real numbers, but it looks backward.
• Forward P/E uses analysts’ estimates for the next 12 months. It looks ahead, but it’s only as good as the forecasts.

The gap between the two tells you something. If forward P/E is lower than trailing, analysts expect earnings to rise. If forward is higher, they expect earnings to fall.

The S&P 500 shows a wide gap right now. FactSet’s trailing 12-month P/E was 26.0 on October 16, 2026, against a forward P/E of 19.0.¹ When you see a P/E quoted, check which one it is. Finance sites often show both.

When P/E misleads you

Negative earnings

If a company lost money, EPS is negative and P/E has no useful meaning. Most data sites show “N/A” or leave it blank. This is common. In Damodaran’s January 2026 dataset, 57% of the 5,994 US firms covered were money-losing on a trailing basis.³ For these companies, people look at other measures, such as price-to-sales.

Cyclical traps

Homebuilders, carmakers, steelmakers and energy producers earn a lot at the top of a cycle and little at the bottom. At the peak, profits are high, so P/E looks low. That “cheap” reading can come right before earnings drop.

The homebuilding row in the table above hints at this. Its forward P/E (14.35) is higher than its trailing figure (11.25), which means analysts expected lower earnings ahead. The same caution applies to UK housebuilders such as Persimmon or Taylor Wimpey. For cyclical stocks, look at earnings across a full cycle, not one good year.

One-off profits

A company can sell a building, a business unit or a stake in another firm. That gain lands in net profit, lifts EPS for one year and pushes P/E down. It won’t repeat next year. Read the income statement, or check whether the reported EPS includes “one-time” or “non-recurring” items. The reverse also happens. A large one-off charge can make P/E look high when the core business is fine.

For a four-part check that goes beyond P/E (sector, the company’s own past, price-to-book and growth), see the free lesson Cheap or Expensive? in Module 1 of UseFinLit.

Practice in UseFinLit

The fastest way to get comfortable with P/E is to use it on real companies. In UseFinLit, the free Module 1 includes the lesson What is the P/E Ratio?, and Module 3 (Premium) has Trailing vs Forward P/E. Each lesson takes about a minute and ends with a short quiz. You can then try your reasoning in a paper portfolio with $100,000 in virtual cash at near-live NYSE and NASDAQ prices. No real money is at risk.

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FAQ

Is a P/E ratio of 20 good?

It depends on the company. On October 16, 2026, a forward P/E of 20 was close to the S&P 500’s 5-year average of 19.8, per FactSet.¹ For a large bank, 20 would be high next to its peers. For a software company, it would be low. Compare it with the sector and the company’s own history.

Is a low P/E always a bargain?

No. A low P/E can mean the market expects profits to fall, the company carries a lot of debt, or last year’s earnings included a one-off gain. Cyclical companies often look cheapest right at their earnings peak.

What does a negative P/E mean?

It means the company lost money over the period measured. The ratio isn’t useful in that case, which is why most sites show “N/A”. Look at revenue trends, cash flow and price-to-sales instead.

Should I use trailing or forward P/E?

Look at both. Trailing P/E uses actual reported profit. Forward P/E uses analyst estimates, which can be wrong. If forward is well below trailing, analysts expect growth. Ask whether that growth looks realistic.

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Author: Tuğçe Sezgin, Co-founder & Product Owner, UseFinLit.

Published: October 21, 2026 · Last updated: October 21, 2026

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Educational only, not financial advice.

References

1. FactSet, Earnings Insight, October 16, 2026 (John Butters). S&P 500 forward 12-month P/E 19.0 (5-year average 19.8, 10-year average 19.1); trailing 12-month P/E 26.0; sector forward P/Es: Consumer Discretionary 23.4, Industrials 22.6, Consumer Staples 22.4, Financials 14.5, Energy 13.3. ↩ ↩² ↩³ ↩⁴ ↩⁵

2. Investor.gov (US Securities and Exchange Commission), Glossary: Price-earnings (P/E) ratio. Accessed October 21, 2026. ↩

3. Aswath Damodaran, NYU Stern, PE Ratio by Sector (US), data as of January 2026. Columns used: “Aggregate Mkt Cap/ Trailing Net Income (only money making firms)”, “Forward PE” and ”% of Money Losing firms (Trailing)”. Accessed October 21, 2026. ↩ ↩²