# What is Price to Earnings Ratio (P/E) of a Stock? (Value Investing for Beginners)

Source: https://www.youtube.com/watch?v=pFi9me1s1nc
Recap page: https://rapidrecap.app/video/pFi9me1s1nc
Generated: 2025-11-11T15:09:54.569+00:00

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## Quick Overview

The Price-to-Earnings (P/E) ratio indicates what the market is willing to pay for each dollar of a company's earnings, essentially reflecting expected future profitability, and it is crucial to compare P/E ratios only between companies in the same industry using historical context, as demonstrated by comparing MetroCoffee (P/E 17) to Daily Brew (P/E 24.5) and Ford (P/E 9) to Tesla (P/E 304).

**Key Points:**
- The P/E ratio, also called a 'multiple' or 'earnings multiple,' calculates how much the market pays for each dollar of a company's earnings (Stock Price / EPS).
- A single P/E snapshot is misleading; smart investors track P/E ratios over time against historical averages and use a 'Range Check' to see if the current P/E is unusually high or low.
- Comparing MetroCoffee (P/E 17, 10% growth) to the smaller Daily Brew (P/E 24.5, 24.5% growth) shows the market pays more for higher expected growth, even if the smaller company is currently less profitable overall.
- Comparing dissimilar industries like Ford (P/E 9, slow growth) and Tesla (P/E 304, rapid growth) yields an invalid comparison, despite both being auto manufacturers, because growth expectations vastly differ.
- Comparing similar industry rivals like Coca-Cola (P/E 27.8) and Pepsi (P/E 20.55) shows Pepsi appears cheaper based on the current P/E, but this ratio alone is insufficient for investment decisions.
- Investors must incorporate growth expectations (using the PEG ratio, explained in a subsequent video) because a high P/E can be justified by rapid expected earnings growth, as seen with Tesla.
- The video concludes by showing that comparing companies from completely different industries (like Pepsi, Consumer Staples, vs. Ford, Auto Manufacturer) based on P/E alone is misleading; only compare similar businesses.

![Screenshot at 0:24: A man stands between two coffee shops, MetroCoffee and The Daily Brew, asking "Which one to choose?" to set up the comparison based on initial P/E metrics \($17 vs $49 stock price and different EPS\).](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-00-24.png)

**Context:** This video serves as a beginner's tutorial on understanding the Price-to-Earnings (P/E) ratio in stock valuation, contrasting companies with similar metrics but different growth profiles (MetroCoffee vs. Daily Brew) and companies in related but distinct sectors (Ford vs. Tesla) to illustrate the ratio's limitations and correct application.

## Detailed Analysis

The video explains that the P/E ratio is a multiple that tells investors how much they are paying for every dollar of a company's earnings, reflecting not just current profitability but also investors' expectations for future growth. A single P/E ratio is misleading; smart investors check the current P/E against its historical range (Historical Average) to determine if it's unusually high or low. The video uses several comparisons: first, MetroCoffee (P/E 17, $1 EPS) versus The Daily Brew (P/E 24.5, $2 EPS), demonstrating that the market prices higher expected growth (Daily Brew's 24.5% growth vs. MetroCoffee's 1% growth) at a premium. Later, it compares Ford (P/E 9, slow growth) to Tesla (P/E 304, rapid growth), both auto manufacturers, highlighting that comparing companies across different growth stages or even slightly different industries (Consumer Staples: Pepsi P/E 20.55 vs. Auto Manufacturer: Ford P/E 9) is an invalid comparison because the P/E ratio inherently incorporates growth expectations. The core takeaway is that P/E is just one tool, and investors must consider growth factors, such as the PEG ratio, for meaningful valuation.

### Calculating P/E Ratio

- P/E = Stock Price / Earnings Per Share (EPS)
- Example calculations for MetroCoffee (17/1=17) and Daily Brew (49/2=24.5)

### Understanding the P/E Ratio

- P/E ratio is called a 'multiple' or 'earnings multiple'
- It reflects investor expectations of future profitability, not just current profits

### Smart P/E Analysis

- Avoid single P/E snapshots as they are misleading
- Use a 'Range Check' against historical averages
- Investigate the 'Change Driver' (change in earnings or price)

### Comparing Similar Businesses (Coffee)

- MetroCoffee (P/E 17, 10% growth) vs. Daily Brew (P/E 24.5, 24.5% growth)
- Daily Brew is priced 44% more expensive for the same earnings due to higher growth expectations

### Comparing Dissimilar Businesses (Automotive)

- Ford (P/E 9, Slow Growth) vs. Tesla (P/E 304, Rapid Growth)
- Although in the same industry, the massive difference in growth expectations justifies the huge P/E gap, making a direct P/E comparison misleading

### The Danger of Cross-Industry P/E Comparison

- Comparing Pepsi (Consumer Staples, P/E 20.55) to Ford (Auto Manufacturer, P/E 9) is invalid because industries have different typical P/E ranges and stability profiles

![Screenshot at 0:04: A man states he has $1000 to invest, setting up a comparison between MetroCoffee \(Profit: $100M, EPS: $1, Stock Price: $17\) and The Daily Brew \(Profit: $10M, EPS: $2, Stock Price: $49\).](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-00-04.png)
![Screenshot at 0:56: A graphic illustrates the core concept: Company A and Company B both have $1 earnings, but Company A trades at $20 \(P/E 20\) while Company B trades at $10 \(P/E 10\), showing the market pays different prices for the same earnings.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-00-56.png)
![Screenshot at 1:14: The formula for P/E ratio is explicitly shown: P/E = Stock Price / Earnings Per Share.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-01-14.png)
![Screenshot at 1:37: Nick, a financial educator, introduces the concept of using P/E ratios to value stocks, noting MetroCoffee trades at 17 times earnings \(P/E 17\).](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-01-37.png)
![Screenshot at 1:58: The P/E metrics are finalized for both coffee companies: MetroCoffee P/E is 17, and Daily Brew P/E is 24.5, leading the investor to question the higher price of Daily Brew.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-01-58.png)
![Screenshot at 2:35: A slide titled "P/E Ratio Changes Constantly" notes that earnings change quarterly and stock prices move daily, meaning P/E is dynamic.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-02-35.png)
![Screenshot at 3:08: A chart illustrates that a single P/E snapshot is misleading, emphasizing the need to compare the current P/E against the historical average trend line.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-03-08.png)
![Screenshot at 4:44: A comparison between Pepsi \(P/E 27.8\) and Ford \(P/E 9\) is labeled as an 'Invalid Comparison' because they operate in completely different industries \(Consumer Staples vs. Auto Manufacturer\).](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-04-44.png)
![Screenshot at 8:09: A direct comparison between Ford \(P/E 9, Slow Growth\) and Tesla \(P/E 304, Rapid Growth\), both auto manufacturers, showing that Tesla's high multiple is priced in for massive future growth expectations.](https://ss.rapidrecap.app/screens/pFi9me1s1nc/00-08-09.png)