The stock price-to-earnings ratio (P/E) is an important indicator of a company's valuation in the market. However, what happens when this number is negative? Let's find out.
A negative P/E results from the earnings per share (EPS) going into negative territory - in other words, when the company is making a loss. Stock analysts treat this number in different ways. Some say that mathematically a negative ratio does not make sense; instead, they just consider it zero or report it as "not applicable". Others will view negative PE as an estimate of how much the company is losing compared to its current stock price.
Either way, a negative PE ratio indicates that a company is losing money. Does this mean that the company is headed for bankruptcy? Not necessarily. For example, a new company may be unable to generate profit at the beginning due to high initial investments or research costs. An example of this would be a stock or an exchange-traded fund based around a new disruptive technology like virtual reality tech.
Whatever the cause, in most situations, a P/E ratio below zero indicates a high risk attached to the investment.