P/E Ratio Explained: When It Helps and When It Misleads

The P/E ratio gets quoted everywhere and understood almost nowhere. This explains it from first principles: what the number actually means, how to work it out, trailing versus forward, why it only compares within a sector, how interest rates move the fair multiple, and why a cheap-looking P/E can be a trap while an expensive one can still be right.

Explain the price-to-earnings ratio to me from first principles. Start with what it literally means and how to calculate it from a share price and EPS. Then go deeper: the difference between trailing and forward P/E, why P/E comparisons only make sense within the same sector, how interest rates affect the fair P/E for the whole market, and why a low P/E stock can still be a bad investment (value traps) while a high P/E stock can be rational. Introduce related valuation multiples (PEG ratio, EV/EBITDA, price-to-free-cash-flow) and when each is more useful than P/E. Use {COMPANY_EXAMPLE} as a worked example throughout if possible.