Valuation
P/E ratio
Also called Price-to-earnings or Earnings multiple
The share price divided by earnings per share — roughly, how many years of current profit you are paying.
How it works
A P/E of 20 means you are paying $20 for each $1 of annual profit. Read the other way round, it is an earnings yield of 5%.
A high P/E is not automatically expensive. It reflects expectations: fast-growing, highly profitable businesses with long runways command higher multiples, and often deserve to.
Where it misleads people
P/E is meaningless when earnings are near zero, negative, or distorted by a one-off. A company whose profit halved due to a single write-down suddenly shows a terrifying P/E and may be perfectly healthy.
Formula
P/E = share price ÷ earnings per shareWorked example
A $60 share with EPS of $3 has a P/E of 20, and an earnings yield of 3 ÷ 60 = 5%.
Related terms
- Earnings per shareNet income divided by the number of shares — the profit attributable to each share you own.
- Earnings yieldEarnings per share divided by price — the P/E ratio inverted, expressed as a percentage.
- Forward P/EPrice divided by the earnings analysts expect next year, rather than last year’s actual earnings.
- PEG ratioThe P/E ratio divided by the expected earnings growth rate, to compare companies growing at different speeds.
- CAPE ratioPrice divided by average inflation-adjusted earnings over ten years, to smooth out the business cycle.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.