What is Price-Earnings Ratio (P/E)? A Real View of the Market

Look, I'll be honest: when I started investing, I thought P/E was just another annoying acronym that the "experts" used to sound smart. But after losing money a few times, I realized that ignoring this indicator cost me dearly.

The P/E ratio is basically how much we are willing to pay for each real that a company earns. Simple as that. If a share costs R$100 and the company earns R$10 per share, the P/E ratio is 10.

The P/E Ratio in Practice

The formula is ridiculously simple: Price per Share ÷ Earnings per Share = P/E

But don't be fooled! This simplicity hides many traps. I've seen many people buying very expensive companies just because some influencer said it "will explode" and completely ignoring that the P/E was through the roof.

There are several types:

• P/L trailing: based on the past (more reliable, in my opinion)
• Forward P/E: based on future projections (pure guesswork by analysts, often)
• Absolute P/E: the raw value
• Relative P/E: compared to other benchmarks

Interpreting Without Illusions

A high P/E ratio does not necessarily mean that the stock is expensive. It can mean that the market is betting on absurd growth. But be careful! How many "next Amazons" have already turned to dust because they did not deliver the growth they promised?

On the other hand, a low P/E ratio can be both a bargain and a trap. That retail company with a P/E of 5 may seem cheap, but if it is drowning in debt and losing market share, it's only a matter of time before it turns to dust.

Why Does This Matter?

The P/E ratio is a quick tool to assess if a stock is worth the price. I use it a lot to compare companies in the same sector - if two technology companies have very different P/E ratios, something strange is happening.

Limitations That No One Tells You About

• Does not work with companies in the red ( and there are many of them!)
• Completely ignores growth ( a company growing 50% per year deserves a higher P/E )
• Can be manipulated with creative accounting
• Does not consider debts ( I have seen a company with a "low" P/E but drowning in debts )

Comparing Between Sectors

It is an amateur mistake to compare the P/E ratio of a technology company with that of an energy distributor. Different sectors, different expectations. Technology usually has a higher P/E ratio because of its growth potential; on the other hand, utility companies tend to have a lower P/E ratio due to being more stable.

P/L and Cryptocurrencies: It Doesn't Work!

I tried to apply this concept to crypto and I messed up. Most coins do not generate profit in the same way as companies. Some analysts try to adapt it for DeFi projects that earn through fees, but it is still very experimental.

This indicator can be useful, but it is not magic. I have seen people buying very expensive stocks just because a "guru" recommended them, ignoring that the P/E ratio was through the roof. And I have also seen people missing out on incredible opportunities because they thought a high P/E ratio automatically meant that the stock was expensive.

Use the P/E ratio, but use your brain as well. It's just one piece of the puzzle, not the complete answer.