Below 10x: statistically cheap
Often deep value, but frequently a market warning. Verify it isn't a value trap with declining earnings.
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What is a good P/E ratio?
There is no single good P/E ratio: it depends on growth, quality, and interest rates. Historically the S&P 500 averages roughly 15-18x earnings. Below about 15x is often considered inexpensive, 15-25x is the normal range for steady growers, and above 25x needs strong, durable growth to justify. The right comparison is P/E against the company's growth rate (a PEG near 1 is the rough fair-value line) and against its sector peers.
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Short answer
A "good" P/E is one that's low relative to the company's durable growth and its peers, not low in absolute terms. A 12x P/E on a no-growth business can be worse value than a 25x P/E on a high-quality compounder. Pair P/E with PEG and FCF yield before judging.
How to read a P/E ratio, by range
10-15x: inexpensive
The classic value zone for profitable, slower-growth companies. Graham's defensive hunting ground.
15-25x: fair for quality growth
Where most durable compounders trade. Reasonable when growth and returns on capital are strong.
Above 25x: premium
Only justified by high, durable growth. Check the PEG ratio and how long the growth runway realistically lasts.
Why context beats the number
Company A trades at 12x earnings but grows 2 percent a year. Company B trades at 24x but grows 18 percent with a 20 percent ROIC. Company B's PEG is about 1.3 and Company A's is 6, on a growth-adjusted basis, the higher P/E is the better value.
P/E is also distorted by one-off charges, leverage, and accounting choices, so cross-check it with FCF yield, which is harder to manipulate. The headline number is a starting point, never the verdict.
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Related
- What is the P/E ratio? - the full definition, the formula, and trailing vs forward P/E.
- What is the PEG ratio? - P/E divided by growth: the cleanest way to judge whether a P/E is justified.
- What is FCF yield? - the cash-based valuation gauge that's harder to game than P/E.
- Top Graham-fit stocks today - the live ranking of statistically inexpensive, financially sound stocks.
See valuation in full context
invest-like shows P/E alongside PEG, FCF yield, and growth on every stock so you can judge whether a multiple is actually cheap.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.