P/E: The Metric Every Investor Should Understand

The Basics

The P/E ratio (Price-Earnings) is basically the answer to a simple question: how much are investors paying for each real of profit of a company?

Formula? Easy: Price per Share ÷ Earnings per Share = P/E

Why This Matters

A high P/E ratio usually means that the market is betting on future growth — investors are willing to pay a high price now because they believe the company will thrive. A low P/E ratio may indicate that the stock is cheap, or that the company is struggling.

But here's the catch: context is everything. Comparing the P/E of a tech startup ( that has a naturally high P/E) with an electricity company ( that has a low and predictable P/E) is like comparing apples to oranges.

The Types

• P/L Trailing: based on the last 12 months — real data, no speculation
• P/L Forward: uses projections — the analyst is betting on future gains
• Relative P/E: compares a company with its competitors or the market — the best way to assess context

The Pranks

1. Does not work with losses — if the company is in the red, forget about the P/E
2. Can be manipulated — some companies tweak the numbers to look good on paper
3. Ignore other important things — debt, cash flow, customer quality… all of this matters

And the Cryptocurrencies?

Here is where it gets complicated. Bitcoin and most cryptos do not have profits in the traditional sense, so the pure P/E ratio does not work. Some DeFi tokens ( that earn from transaction fees ) are testing similar metrics, but it is still experimental.

The Real

The P/E ratio is a good first step to understand if a stock is expensive or cheap, but never use just that. Combine with revenue analysis, margins, debt levels, and comparison with competitors. It's like choosing an apartment solely based on the price per square meter — you need to look at the location, structure, and neighborhood.