P/E Ratio and EPS — The Core Valuation Metrics
Fundamental analysis evaluates a company's intrinsic value by examining financial statements, competitive position, and industry dynamics. The price-to-earnings ratio (P/E) is the most widely cited valuation metric: P/E = Stock Price / Earnings Per Share. A P/E of 20 means investors are paying $20 for every $1 of annual earnings — they expect future growth that will justify this multiple. Earnings Per Share (EPS) = Net Income / Shares Outstanding. If a company earns $500 million net income with 100 million shares outstanding, EPS = $5.00. At a $100 stock price, P/E = 100/5 = 20. P/E interpretation requires context. The S&P 500's historical average P/E is approximately 15–17x. High-growth technology companies often trade at 30–60x P/E, justified if earnings grow at 20–30% annually — investors pay for expected future earnings, not just current earnings. Cyclical companies (autos, materials) at high P/E during a downturn may be deceptively cheap if their depressed earnings will recover. Value investors (following Benjamin Graham) seek companies trading below intrinsic value — low P/E relative to peers and historical averages, significant margin of safety. Growth investors (following Philip Fisher) accept high P/E for companies with exceptional competitive advantages and sustainable above-market earnings growth. The forward P/E uses analyst consensus estimates of next year's EPS, giving a forward-looking valuation that may differ substantially from the trailing P/E.