What is P/E Ratio? [and Why it SUCKS!]

Why is the PE ratio, the most popular investing term for investors, totally worthless? What is the price-earnings-ratio and why do professional investors laugh when they hear it?

I’ve worked as an equity analyst for a decade and can tell you, the biggest lie on Wall Street is the PE ratio. The pundits in the financial media love it but it is a horrible measure for picking stocks. Use it and LOSE money!

In this video, I’ll reveal three reasons why the PE ratio is a bad measure of a stock’s value. I’ll show you how to find the price-to-earnings ratio, if you still want to use it. I’ll also show you three other stock picking techniques that work better.

I’ll start off defining the PE ratio and showing you how to calculate it. I’ll then reveal what the PE ratio means and show you what is a good PE ratio. Then I’m going to blow your mind by revealing what is tragically wrong with the price-to-earnings measure for stocks and three valuation tools to use instead.

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Must Watch Investing Videos:

1:35 What is the PE Ratio?
2:05 How to Calculate PE Ratio
3:00 What does the price-to-earnings ratio mean?
5:05 What is a good PE ratio?
6:30 What is the average PE ratio?
10:40 What is the price-to-sales ratio?
12:10 What is the price-to-book ratio?
13:53 What is the price-to-cash flow ratio?

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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.

[GenExDividendInvestor]

I think it’s like any metric. In isolation it’s not great, but used in context while also using other financial metrics gives it some use. Valuing companies is an art and a science, and PE’s are one helpful ingredient that shouldn’t be overly used.

[PassiveIncomeTom]

*Thanks for going over this as well as the comparison of stocks especially in similar fields.* 👍

[celsiusfahrenheit]

Thanks for the advice. I just finished a semester in Managerial Accounting part of an MBA and learned all about the financial statements which now I realized has helped me more easily understand the financial market.

[gem_trades]

Great video! Mind blowing! I will definitely need to go over this a few times!!

[Squintillions]

End screen links work! Missed this one when you released it. Nice refresher on P/E ratios.

[charcoaljohnson]

Excellent video, I never knew what these accounting terms meant.

[jaredlove]

Bow tie nation, I love Thanks for the great video Joseph

[InvestingBookSummaries]

I like looking at levered free cash flow myself.

[hanst]

5:51 I think you only need to know one thing: it's already priced in.

[GregK]

Thanks for sharing the limitations of PER and suggesting alternatives. Numbers by themselves are so "easy" to use, but without context are usually meaningless (i.e., can be made to "mean" anything). Nice reminder that homework for investing should be both qualitative and quantitative. BTW, which statistics have been defined by recognized organizations. I believe FFO has been defined by NAREIT, but AFFO depends on the company. Are there others?

[JayChaimArbiv]

I kinda like the slight dirty language. I can feel your frustration with that indicator :)

I just wish you could go over the last example together since it is your favorite and you think it is the most exacting and maybe not go through the math with less accurate. Great episode though - Thanks

[captnhuffy]

I would have loved it if the chart at 0:58 scale zoomed in, changed scale to focus on 1960 forward, then 2008 forward.

[RyanCGuitar]

Hi Joseph, excellent video! Would you mind taking a look at my thought process and seeing if I'm on the right track?


Target (TGT) Walmart (WMT)
P/E 18 25
Past 5 Yrs Aver 14.44 24.43
% Diff Average 26% 1%
P/S 0.72 0.66
P/B 4.69 4.9
P/CF 9.15 12.36


I wanted to compare TGT and WMT from a value perspective. I calculated the PEs for TGT and WMT and first compared them since they are industry peers. Looks like using that, TGT looks a little cheaper. But then like your video discussed, does that mean it's actually cheap in of itself? I pulled the 5 yr PE averages, and it looks like TGT is actually about 26% above its historical PE! WMT is more in line with where it has been trading. Now I suppose that P/E could be warranted because it's recent growth has investors willing to pay a premium. Any thoughts on this aspect?


P/S looks roughly similar with WMT a bit cheaper. P/B about the same as well. P/CF (nice and clean!) looks to clearly show you make a better move from a CF perspective picking TGT. I think given the P/CF and P/E relative to WMT (even though it is above it's historical average) seem to show TGT the better value play. Seriously appreciate any feedback and subscribed! Look forward to watching more on your channel. When I saw that CFA title on your video, I knew I found the right resource! Thanks!

[jasonparker]

How about the DCF model? What are your thoughts on it?

[Carlos-kvhx]

Great video. Could you do a review on the Shiller P/E and CAPE ratios?

[sgpappu]

seriously...u explained very well.. but I agree all of these can be fudged... one need to do deep analysis... P/Rev can be wrong is company is selling on Credit.. so every info has to be checked.. It's not so easy as I had thought..

[michealsizemore]

Great video. From what website did you get the 'Average PE Ratio for each Sector'. I have been looking but have not been able to find a website that will give that information.

[teencred]

Interesting how each of the three alternatives to the P/E ratio uses one of the three main financial statements.

[hadestech]

Joseph, PE Ratio analysis to a long sewer. I liked that, and it's true sometimes. Thanks

[garywijaya]

How do you find number of shares issued?