The P/E ratio shows the market value of a stock compared to thecompany's earnings. The P/Eratio shows what the market is willing to pay today for a stock based on its past or futureearnings. It is possible for a stock to have a negative price-to-earnings ratio (P/E).
A high P/E typicallymeansa stock's price is high relative to earnings whilea low P/Eindicates astock's price is low comparedto earnings. The P/E is calculated by dividing the current price by the current earnings per share or EPS.
A high P/E ratio could be an indicator that investors expect earningsgrowthin the coming quarters because they have bought stock in anticipation of its appreciation.
What Does the Price-to-Earnings (P/E) Ratio Indicate?
Investors usethe P/E ratio to determine if astock is overvalued or undervalued. However, investors also use the P/E to gauge market expectations forfuture earnings growth. A high P/E might indicate that investors expect earningsgrowthin the coming quarters and, as a result, investors have been buying the stock in anticipation of its appreciation.
A negative P/E ratio means the company has negative earnings or is losing money. Even the most established companies experience down periods, which may be due to environmental factors that are out of the company's control. However, companies that consistently showa negative P/E ratio are not generating sufficient profit and run the risk of bankruptcy.
A negative P/E maynot be reported. Instead,the EPS might bereported as "not applicable" for quarters in which a company reported a loss. Investors buying stock in a company with a negative P/E should be aware that they arebuying shares of an unprofitable company and be mindfulof the associated risks.
Key Takeaways
The P/Eratio shows what the market is willing to pay today for a stock based on its past or futureearnings.
A stock can have a negative P/E ratio.For example, if they are newly launched and have not accumulated earnings.
A high P/E typicallymeansa stock's price is high relative to earnings.
A low P/Eindicates astock's price is low comparedto earnings and the company may be losing money.
A consistently negative P/E ratio run the risk of bankruptcy.
Under What Circ*mstances Would a Company Have a Negative Price-to-Earnings (P/E) Ratio?
While a negative P/E ratio indicates a company is reporting losses, this is not always a sign of impending bankruptcy. A company might have a negative P/E ratio yet be on a path to growth. I a company changes its accounting systems or policies, that might change the P/E ratio. Similarly, changes in depreciation or amortization policies in a particular year or a market trend might cause companies to report a negative P/E ratio temporarily.
An investor should become alarmed if a company consistently shows a negative P/E ratio for a long period, for example, five years in a row. If this is the case, the company is not in good financial health.
When Is a Negative P/E Less of a Concern?
In some sectors, it is not uncommon for companies to show negative P/Es when they are newly launched. Pharmaceuticalcompanies that invest billions of dollars in drug research may report a loss for years before turning a profit. Also, technology companies may post a loss initially,yet the stock price may rise significantlydue to market expectations of positive earnings growth in the coming years.As with any financial metric, it's important to compare the P/E ratio with the P/E ratios of other companies in the same industry.
FAQs
It's possible for a stock to have a negative price-to-earnings (P/E) ratio. But it's not always a cause for concern. A company might be newly launched and not yet have accumulated earnings. Or a company might be on a path to growth.
Can a stock have a negative PE ratio? ›
Negative P/E ratios are mathematically possible, but because they are generally not accepted by the financial community, they are usually reported as "N/A" or not applicable. A stock can't have a negative price in the market.
What happens when a stock has negative earnings? ›
What Are Negative Earnings? If a company has negative earnings, it means it reported a loss for the specified time period. This may mean that a company is either losing money and is experiencing some financial difficulty.
What does a 0 PE ratio mean? ›
Additionally, companies may have negative or no earnings, leaving you with either a “0” P/E ratio or a negative one, which is not useful for comparison purposes. Another downside of P/E ratios is that you cannot use them to compare companies from different sectors.
Is it possible for stock price to be negative? ›
No. A stock price can't go negative, or, that is, fall below zero.
Does low PE mean undervalued? ›
In general, a high P/E suggests that investors expect higher earnings growth than those with a lower P/E. A low P/E can indicate that a company is undervalued or that a firm is doing exceptionally well relative to its past performance.
Why is PE ratio misleading? ›
The biggest limitation of the P/E ratio: It tells investors next to nothing about the company's EPS growth prospects. If the company is growing quickly, you will be comfortable buying it even it had a high P/E ratio, knowing that growth in EPS will bring the P/E back down to a lower level.
What is a good PE ratio to buy? ›
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
Why is Amazon PE ratio so high? ›
Why is Amazon PE Ratio so high? Amazon's P/E ratio is higher than most companies in the retail industry because investors are optimistic about its future growth potential. As mentioned, a high price multiple can indicate the market expects higher growth from a company.
Is 30 a bad PE ratio? ›
P/E 30 Ratio Explained
A P/E of 30 is high by historical stock market standards. This type of valuation is usually placed on only the fastest-growing companies by investors in the company's early stages of growth.
If a stock goes negative, do you owe money? If you do not use borrowed money, you will never owe money with your stock investments. Stocks can only drop to $0.00 per share, meaning you can lose 100% of your investment but not more than that, seeing as the stock cannot be of negative value.
Can you lose money in stocks if you don't sell? ›
Do You Lose Money When Stocks Drop? When the stock market declines, the market value of your stock investment can decline as well. However, because you still own your shares (if you didn't sell them), that value can move back into positive territory when the market changes direction and heads back up.
Has a stock ever come back from $0? ›
Can a stock ever rebound after it has gone to zero? Yes, but unlikely. A more typical example is the corporate shell gets zeroed and a new company is vended [sold] into the shell (the legal entity that remains after the bankruptcy) and the company begins trading again.
What is the PE ratio of an undervalued stock? ›
Low P/E ratio stocks represent undervalued assets and are favoured by value investors. It indicates that: The stock is trading at a discount relative to its earnings potential. Investors have an opportunity to buy quality companies at a lower price\
What is the PE ratio of Tesla? ›
As of today (2024-06-15), Tesla's share price is $178.01. Tesla's Earnings per Share (Diluted) for the trailing twelve months (TTM) ended in Mar. 2024 was $3.92. Therefore, Tesla's PE Ratio (TTM) for today is 45.41.
Can equity value per share be negative? ›
Current Equity Value cannot be negative, in theory, because it equals Share Price * Shares Outstanding, and both of those must be positive (or at least, greater than or equal to 0).
