Can Stocks Have a Negative Price-to-Earnings (P/E) Ratio?

Yes, it is possible for a stock to have a negative price-to-earnings (P/E) ratio.

While the P/E ratio is often seen as high or low, a negative P/E occurs if a company has a loss for an accounting period rather than a profit.

Since the P/E ratio is a stock price relative to earnings-per-share, a high P/E ratio means that a stock’s price is high relative to earnings. A low P/E ratio indicates that a stock’s price is low compared to earnings.

Of course, you’d only be able to conclude that it’s high or low by tracking it over time. For example, if it rarely changed or changed little, you’d perceive it as neither high nor low, but stable.

What Is the P/E Ratio?

The P/E ratio compares the price of a share of a company’s stock to the earnings per share. Earnings per share is the company’s profit, or earnings, divided by its number of shares outstanding.

It shows the price investors are willing to pay for a stock based on its past or perceived future earnings.

You calculate it with this formula:

Share Price ÷ Earnings per Share

P/E is a metric that investors use, along with others, to assess whether or not to invest in a particular company. You can study it for a single business as well as compare it to P/Es for other companies in the same industry.

For example, if the P/E ratio for one company differs greatly from others in its industry, you’d want to research why this is so and whether an investment opportunity exists.

What Is a Negative P/E Ratio?

A negative P/E ratio means a company has negative earnings—it’s losing money. The denominator of the P/E formula shown above would be a negative number.

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 show a negative P/E ratio are not generating sufficient profit and run the risk of bankruptcy.

A negative P/E ratio may not be reported. Instead, the earnings per share (EPS) might be reported 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 are buying shares of a company that has been unprofitable in previous quarters. They should be mindful of the risks that implies.

Implications of a Negative P/E Ratio

While a negative P/E ratio reflects no earnings per share and that 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. It could be a start-up that shows enormous promise but isn’t making a profit yet.

In fact, in some sectors, it is not uncommon for companies to show negative P/E ratios when they are newly launched.

For example, pharmaceutical companies 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 significantly due to market expectations of positive earnings growth in the coming years.

In addition, 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 be wary 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.

Uses for the P/E Ratio

Generally, investors use the P/E ratio, along with other metrics, to assess whether or not to invest in a particular company. You can study it for a single business as well as compare it to P/Es for other companies in the same industry.

For example, if the P/E ratio for one company differs greatly from others in its industry, you’d want to research why this is so and whether an investment opportunity exists.

In particular, many investors use the P/E ratio to determine if a stock is overvalued or undervalued. They can also use it to gauge market expectations for future earnings growth.

Companies that consistently show a negative P/E ratio are not generating sufficient profit and run the risk of bankruptcy.

The Bottom Line

It’s possible for a company to have a negative price-to-earnings (P/E) ratio but it’s not always a cause for concern.

There are various reasons for a negative P/E ratio—for instance, a company might be new and not yet have made a profit.

However, the alarm bells should go off if a company consistently shows a negative P/E ratio for a long period, such as multiple consecutive years. This indicates a business in trouble.