If you are searching for value in the stock market, the price-to-earnings (P/E) ratio is a useful tool. A high P/E suggests a business is highly valued, while a low P/E indicates the stock may be undervalued. Buying stocks with low price-to-earnings ratio can give investors long-term growth potential in this market.

In general, the P/E ratio is used to find stocks trading at a discount compared to the overall market. The ratio is as follows:

• P/E = Current Stock Price / Earnings-Per-Share (EPS)

For one thing, it can be a great starting point for identifying value stocks and hidden opportunities. At the same time, it shouldn’t be the only factor in your buying decision (more on this later.) With this in mind, let’s look at the top stocks with low price-to-earnings ratio right now and why they are worth a consideration.

P/E Ratio Meaning

Although you know breakdown of the P/E ratio, do you know what it means? On the one hand, a company’s stock price reflects investor sentiment. On the other hand, a company’s EPS is one of the most important fundamental factors.

For those that don’t know, EPS takes a firm’s net income and divides it by the number of shares trading on the market. Essentially it can be seen as how much money a company makes per investor.

With this in mind, the P/E ratio is an important measure of profitability. If a company is generating higher earnings, it can suggest they are improving and becoming more profitable. Meanwhile, stocks with low price-to-earnings ratio can mean investors have not yet caught up to the earnings growth.

How to Use the Price-to-Earnings Ratio

Then again, there is a reason some stocks with low price-to-earnings are cheap. A company can have positive earnings with no growth. In this case, the stock is less desirable, and few investors want to buy it.

So, if you are using the P/E ratio to find growth stocks, it will take a little more digging. For example, you can add earnings growth to the equation with the PEG ratio. This takes the P/E ratio and divides it by the firm’s annual EPS growth. Then, you can look for low-valued stocks that are also growing annually.

And lastly, a major issue with the P/E ratio is that it uses past earnings. With the forward P/E ratio, you can look at future earnings (forecasted) rather than the past earningss.

Top 10 Stocks With Low Price-to-Earnings Ratio

To find the best stocks with low price-to-earnings ratio for long-term growth, I am screening for companies with a low forward P/E (under 15) and low PEG (under 2). Then, I also took into account the company’s free cash flow (FCF). And finally, the stock must also pay a dividend.

With this in mind, here are the top low P/E stocks right now based on these inputs.

• Harley Davidson (NYSE: HOG)
• Vale S.A (NYSE: VALE) (See More)
• Ford (NYSE: F) (See More)
• Walgreens Boots Alliance (Nasdaq: WBA) (See More)
• Meta Platforms (Nasdaq: FB) (See More)
• NortonLifeLock (Nasdaq: NLOK)
• Devon Energy (NYSE: DVN) (See More)
• Discover Financial Services (NYSE: DFS)
• JPMorgan (NYSE: JPM) (See More)
• American Express (NYSE: AXP) (See More)

These companies generate cash for investors while also trading at a discount compared to the overall market. But, most importantly, these stocks give investors the ability to compound earnings with dividends.

Adding dividend stocks to your portfolio can help build long-term wealth by multiplying your returns over time.

What Is a Good P/E Ratio

When using the P/E ratio to find stocks, there are a few things you need to keep in mind. For one thing, different industries will naturally have different average P/E ratios.

For example, tech stocks are known for having a higher price to earnings ratio. In general, tech produces higher future earnings than financial stocks. So, investors are willing to pay a higher premium to invest in tech stocks in the hope that this trend will continue.

As a general rule of thumb, stocks with a P/E ratio under 15 are considered low value. But as previously mentioned, this number is relative.

If you want to compare stocks by their P/E ratios and get the most accurate results, stay within the industry. In other words, comparing tech to materials is like comparing apples to oranges. Instead, it can be a helpful metric when looking within an industry to find patterns.

At the same time, a higher P/E ratio is not always a bad thing, it can indicate the company is still growing. For example, since turning a profit, Tesla’s (Nasdaq: TSLA) P/E ratio is floating over 100, reaching over 1,100 at one point.

Is it Worth Investing in Stocks With Low Price-to-Earnings Ratio

To answer this question, it depends on the type of investor you are. Are you looking for value? Or, are you seeking quick returns?

Investing in stocks with low price to earnings can be a useful strategy for finding long-term stock candidates. But it can be an even more helpful tool when paired with other factors. As I have noted above, using the PEG and forward P/E ratio can help narrow down your search results. Then, it’s  important to understand the business and why you want to own a piece of it.

Does it have a new product? A competitive advantage? Or, maybe you are investing for the dividends.

Either way, looking at a company’s price-to-earnings ratio can be a great starting point while researching stocks. And lastly, keep in mind, the P/E ratio shows worth per shareholder, which doesn’t always translate to returns.