Yes, it is possible for a stock to have a negative price-to-earnings (P/E) ratio.The P/E ratio shows the market value of a stock compared to thecompany’s earnings. It also shows what the market is willing to pay today for a stock based on its past or futureearnings.
A high P/E ratio typicallymeansthat a stock’s price is high relative to earnings, whilea low P/Eratio indicates that astock’s price is low comparedto earnings. The P/E ratio is calculated by dividing the current price by the current earnings per share (EPS).
Key Takeaways
- The price-to-earnings (P/E)ratio shows what the market is willing to pay today for a stock based on its past or futureearnings.
- A stock can have a negative P/E ratio—for example, if they are newly launched and have not accumulated earnings.
- A high P/E ratio typicallymeansa stock’s price is high relative to earnings.
- A low P/Eratio indicates that astock’s price is low comparedto earnings and that the company may be losing money.
- A consistently negative P/E ratio runs the risk of bankruptcy for the company.
A high P/E ratio could be an indicator that investors expect earningsgrowthin the coming quarters because they have bought stock in anticipation of its appreciation.
What Does the Price-to-Earnings (P/E) Ratio Indicate?
Investors usethe P/E ratio to determine if astock is overvalued or undervalued. However, investors also use the P/E ratio to gauge market expectations forfuture earnings growth. A high P/E ratio might indicate that investors expect earningsgrowthin the coming quarters and, as a result, investors have been buying the stock in anticipation of its appreciation.
A negative P/E ratio means the company has negative earnings or is losing money. Even the most established companies experience down periods, which may be due to environmental factors that are out of the company’s control. However, companies that consistently showa negative P/E ratio are not generating sufficient profit and run the risk of bankruptcy.
A negative P/E ratio maynot be reported. Instead,the earnings per share (EPS) might bereported as “not applicable” for quarters in which a company reported a loss. Investors buying stock in a company with a negative P/E ratio should be aware that they arebuying shares of an unprofitable company and be mindfulof the associated risks.
Under What Circ*mstances Would a Company Have a Negative Price-to-Earnings (P/E) Ratio?
While a negative P/E ratio indicates a company is reporting losses, this is not always a sign of impending bankruptcy. A company might have a negative P/E ratio, yet be on a path to growth. If a company changes its accounting systems or policies, that might change the P/E ratio. Similarly, changes in depreciation or amortization policies in a particular year or a market trend might cause companies to report a negative P/E ratio temporarily.
An investor should become alarmed if a company consistently shows a negative P/E ratio for a long period—for example, five years in a row. If this is the case, then the company is not in good financial health.
When Is a Negative P/E Ratio Less of a Concern?
In some sectors, it is not uncommon for companies to show negative P/E ratios when they are newly launched. For example, pharmaceuticalcompanies that invest billions of dollars in drug research may report a loss for years before turning a profit. Also, technology companies may post a loss initially,yet the stock price may rise significantlydue to market expectations of positive earnings growth in the coming years.
As with any financial metric, it’s important to compare the P/E ratio with the P/E ratios of other companies in the same industry.
What Is the Price-to-Earnings (P/E) Ratio?
The price-to-earnings (P/E) ratio measures a company’s share price relative to its earnings per share (EPS).It helps to assess the relative value of the company’s stock.
How Do I Calculate the P/E Ratio?
Divide a company’s current stock price by the current earnings per share (EPS).
What Are Some Companies With the Best and Worst P/E Ratios?
Companies with the best P/E ratios as of June 2024 include W&T Offshore (USA), Metro AG (Germany), and ProKidney (USA).
Companies with the worst P/E ratios as of June 2024 include Kuuhubb (Finland), Mesoblast (Australia), and Spin Master (Canada).
The Bottom Line
It’s possible for a stock to have a negative price-to-earnings (P/E) ratio. But it’s not always a cause for concern.
A company might be newly launched and not yet have accumulated earnings. Or a company might be on a path to growth. Or a company might have changed its accounting systems or policies, or its depreciation or amortization policies in a particular year. The alarm bells should only go off if a company consistently shows a negative P/E ratio for a long period, such as multiple consecutive years.
FAQs
It's possible for a stock to have a negative price-to-earnings (P/E) ratio. But it's not always a cause for concern. A company might be newly launched and not yet have accumulated earnings. Or a company might be on a path to growth.
Can you have a negative PB ratio? ›
A negative P/B ratio indicates that a company has more liabilities than assets. However, this is not always bad news for investors. Some companies carry heavy debt, or there might be outside economic factors that are temporarily impacting the company.
What is considered a bad PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
What is the PE ratio for undervalued stocks? ›
A low PE ratio is a valuation metric that indicates a stock's price is low relative to its earnings. Generally, one may consider low PE ratio stocks as undervalued. Thus, identifying low PE ratio stocks is important because it can help you find undervalued companies.
Is it possible to have negative earnings per share? ›
A negative EPS is a sign that a company is spending more than its revenue and losing money. What does it mean if EPS decreases? A decreasing EPS can indicate a decline in the company's profits. It may also be a sign that the company will be less likely to pay dividends to shareholders in the future.
Can a stock have a negative PE ratio? ›
Negative P/E ratios are mathematically possible, but because they are generally not accepted by the financial community, they are usually reported as "N/A" or not applicable. A stock can't have a negative price in the market.
Is it possible for ratio to be negative? ›
There is no rule that the ratio has to be positive. Your work is correct, but it's possible to have a negative ratio. Therefore, both A=6 and A=−6 will satisfy the ratio. It is true that a ratio between natural numbers will always be positive.
What is the best PE ratio to buy a stock? ›
Average PE of Nifty in the last 20 years was around 20. * So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
What should be the pb ratio of stock to buy? ›
Conventionally, a PB ratio of below 1.0, is considered indicative of an undervalued stock. Some value investors and financial analysts also consider any value under 3.0 as a good PB ratio.
Do you owe money if a stock goes negative? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
A high P/E ratio may suggest that investors are expecting higher earnings in the future. The P/E ratio can be misleading because it is either based on past data or projected future data (neither of which are reliable) or possibly manipulated accounting data.
What is the most undervalued stock? ›
For September 2024, the most undervalued stocks—those with the lowest price-to-earnings (P/E) ratios for each sector—include oil and gas company Diversified Energy Company (DEC), healthcare company Roviant Sciences (ROIV), Argentinian bank Banco Macro (BMA), and Belgian international shipping company Euronav NV (CMBT).
What is a fair PE ratio? ›
The average market P/E ratio is 20-25 times earnings. Estimated earnings can be used to calculate the projected P/E ratio.
Should you invest in a company with negative earnings? ›
A firm may report negative net income, but it doesn't always mean it is a bad investment. Free cash flow is another form of profitability and can be measured instead of net income.
Why do some stocks not have a PE ratio? ›
The P/E Ratio is calculated by dividing a stock's price by its earnings per share. As an example, a stock with a price of $90 and earnings per share of $10 has a P/E Ratio of 9 (90/10). Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator.
What is a good EPS for a stock to buy? ›
Ideally, annual EPS also is up 25% or more, or least compares favorably to industry peers. "Percentage change in EPS is the single most important element in stock selection today. The greater the percentage increase, the better," IBD founder William O'Neil wrote in "How to Make Money in Stocks."
Can retention ratio be negative? ›
The higher the net income, the higher the retention rate. Negative retention rate: When a company pays its shareholders more dividends than the profits it earns in a year, the result yields a negative retention rate.
Is it possible to have a negative Times Interest Earned ratio? ›
A low or negative TIE ratio indicates that debt service may be taking up too much of a company's operating expenses. If debt payments continually exceed revenue, a company risks missing essential payments on items like salaries, accounts payable, and income tax.
Can debt to equity ratio be negative? ›
A negative debt-to-equity ratio indicates that the company has more liabilities than assets. The company would be seen as extremely risky and or at risk of bankruptcy.
Can ratio test be negative? ›
As you can see, to use the test for a particular series an, you take the limit as n approaches infinity of the absolute value of the expression created from the n + 1 term of the series over the n term of the series. Because you are taking the limit of an absolute value, your limit will never be negative.