How the P/E Ratio Can Save You From Buying Overpriced Stocks (With Real Examples)

What if I told you one simple number could have saved you from buying Peloton (PTON) at $160 in 2021? When PTON was trading at its peak, its P/E ratio was over 300. Today, it’s trading at just $4.50 per share.

The Price-to-Earnings (P/E) ratio is one of the most powerful tools in an investor’s toolkit — but only if you know how to use it correctly. In this guide, we’ll break down everything you need to know about P/E ratios, including real-world examples, common mistakes, and pro tips.

What Exactly Is a P/E Ratio?

Think of the P/E ratio like the price tag on a house relative to its rental income. If a house costs $1 million and generates $50,000 per year in rent, its "P/E ratio" would be 20. Similarly, a stock’s P/E ratio tells you how much investors are willing to pay for $1 of a company’s earnings.

Formula: P/E Ratio = Stock Price / Earnings Per Share (EPS)

For example, if Apple (AAPL) is trading at $200 and its EPS is $7, its P/E ratio would be 28.6. This means investors are paying $28.60 for every $1 of Apple’s earnings.

Why Does the P/E Ratio Matter?

The P/E ratio helps you answer one critical question: Is this stock overvalued or undervalued? A high P/E ratio suggests investors expect strong future growth, while a low P/E ratio might indicate a bargain — or a company in trouble.

Here’s a quick comparison of P/E ratios across popular stocks in 2026:

As you can see, Tesla (TSLA) has a much higher P/E ratio than Berkshire Hathaway (BRK.B). This reflects Tesla’s high growth expectations versus Berkshire’s stable, mature business.

How to Calculate P/E Ratio

Calculating the P/E ratio is straightforward:

1. Find the Stock Price: Use the current market price.
2. Find the Earnings Per Share (EPS): Look at the company’s income statement or use financial platforms like MainRatios.

Example: If Microsoft (MSFT) is trading at $400 and its EPS is $12, its P/E ratio is 33.3.

Pro Tip: Always use trailing twelve months (TTM) earnings for the most accurate picture. Forward P/E ratios, which use estimated future earnings, can be misleading.

Real-World Examples of P/E Ratios

Let’s look at how the P/E ratio plays out in real-world scenarios:

1. Apple (AAPL): With a P/E of 28, Apple is slightly above the tech industry average. This reflects its dominance and consistent earnings growth.
2. Tesla (TSLA): At 60, Tesla’s P/E is sky-high. Investors are betting on massive future growth, but this also makes it risky.
3. Berkshire Hathaway (BRK.B): With a P/E of 22, Berkshire is a classic value stock. Its lower P/E reflects its mature, slower-growth business.
4. NVIDIA (NVDA): NVIDIA’s P/E of 50 reflects its leadership in AI and semiconductors. Investors expect explosive growth in these sectors.
5. Peloton (PTON): Peloton’s P/E of 300 in 2021 was a red flag. Today, it’s negative because the company is losing money.

Common Mistakes to Avoid

1. Ignoring Industry Averages: A P/E of 30 might be high for a utility company but low for a tech stock.
2. Using Forward P/E Blindly: Forward P/E relies on earnings estimates, which can be wildly inaccurate.
3. Comparing Mismatched Companies: Comparing Tesla (TSLA) to Berkshire Hathaway (BRK.B) is like comparing apples to oranges.
4. Ignoring Negative Earnings: A negative P/E means the company is losing money. Treat these cases with caution.

Pro Tips for Using P/E Ratios

1. Compare Across Peers: Compare Microsoft (MSFT) to other tech giants like Apple (AAPL) and Google (GOOGL).
2. Look for Trends: A rising P/E could signal improving investor sentiment.
3. Combine with Other Metrics: Use EV/EBITDA for a more complete picture.
4. Watch for Outliers: Extremely high or low P/E ratios often indicate something unusual.

When NOT to Use the P/E Ratio

The P/E ratio isn’t always the right tool. Here’s when to avoid it:

1. Negative Earnings: Companies like Peloton (PTON) have negative P/E ratios when they’re losing money.
2. Cyclical Industries: Earnings can swing wildly in industries like energy or automotive.
3. Growth Stocks: High-growth companies like Tesla (TSLA) often have inflated P/E ratios.

Quick Recap

• P/E Ratio = Stock Price / Earnings Per Share (EPS)
• High P/E suggests growth expectations; Low P/E suggests undervaluation or trouble.
• Compare P/E ratios within the same industry.
• Use trailing twelve months (TTM) earnings for accuracy.
• Combine P/E with other metrics like EV/EBITDA.

Ready to analyze these stocks yourself? Search any ticker on MainRatios to see valuations from 6 legendary investors — free.