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? ›
To understand a negative P/E ratio its important to note that the value of a stock can never be negative. So a negative P/E ratio only happens when theres a negative EPS. A companys earnings might be negative when it either has no earnings during a quarter or reports a loss.
Is it possible to have negative earnings per share? ›
A negative EPS is a sign that a company is spending more than its revenue and losing money. What does it mean if EPS decreases? A decreasing EPS can indicate a decline in the company's profits. It may also be a sign that the company will be less likely to pay dividends to shareholders in the future.
Can a stock have a negative price? ›
No. A stock price can't go negative, or, that is, fall below zero.
Does a low PE ratio mean a stock is 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.
How do you know if PE ratio is good or bad? ›
A higher PE suggests high expectations for future growth, perhaps because the company is small or is an a rapidly expanding market. For others, a low PE is preferred, since it suggests expectations are not too high and the company is more likely to outperform earnings forecasts.
What does a 0 PE ratio mean? ›
The p/e or price to earnings ratio is a mathematical ratio. Mathematically, the ratio can't become zero, since the stock price will rarely become a complete zero. The only possibility is the stock getting delisted from the exchange, when technically it's a zero value stock.
How can a stock have a negative payout ratio? ›
If a company is projected to lose money in a forecasted period, mathematically that would make the payout ratio negative. For example, if a company pays a $1 annual dividend but is expected to lose $4 per share next year, its forward-looking payout ratio will be -25%.
What does it mean when a stock has no P/E ratio? ›
The P/E Ratio is calculated by dividing a stock's price by its earnings per share. As an example, a stock with a price of $90 and earnings per share of $10 has a P/E Ratio of 9 (90/10). Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
What is Amazon PE ratio? ›
Amazon.com PE Ratio: 54.23 for June 26, 2024.
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
Do I owe money if stock goes negative? ›
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 a stock go to zero? ›
If a stock falls to or close to zero, it means that the company is effectively bankrupt and has no value to shareholders. “A company typically goes to zero when it becomes bankrupt or is technically insolvent, such as Silicon Valley Bank,” says Darren Sissons, partner and portfolio manager at Campbell, Lee & Ross.
Should I buy a stock with negative PE ratio? ›
The Bottom Line
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.
What are signs of an undervalued stock? ›
The following tips and clues can help determine whether a stock is undervalued.
- Low valuation ratios. ...
- Company insiders are buying. ...
- The stock price has meaningfully declined. ...
- Successful investors are buying.
Typically, companies in very stable, mature industries that have more moderate growth potential have lower P/E ratios than companies in relatively young, quick-growing industries with robust future possibilities.
What if PE ratio is too low? ›
If the share price falls much faster than earnings, the PE ratio becomes low. A high PE ratio means that a stock is expensive and its price may fall in the future. A low PE ratio means that a stock is cheap and its price may rise in the future. The PE ratio, therefore, is very useful in making investment decisions.
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.
What does it mean when a stock doesn't have a PE ratio? ›
A price-to-earnings ratio (P/E ratio) is a tool investors use to determine a stock's viability and potential for growth. A P/E ratio of N/A means the ratio is not available or not applicable for that company's stock.
What is the PE ratio of Tesla? ›
Therefore, Tesla's PE Ratio (TTM) for today is 50.09. During the past 13 years, the highest PE Ratio (TTM) of Tesla was 1396.86. The lowest was 31.23. And the median was 104.27.
