What Is the P/E Ratio?
The price-to-earnings ratio compares a company's share price with its earnings per share. How to calculate it, what a high or low P/E can mean, and why it's never enough on its own.
In one sentence
Price-to-earnings ratio (P/E). A company's share price divided by its earnings per share: how many dollars investors pay for each dollar of yearly profit.
How it works
P/E ratio = Share price ÷ Earnings per share
The P/E says how many dollars investors are paying for each dollar of a company's yearly profit. It can use the last 12 months of earnings, called trailing, or forecasts for the next 12, called forward. Always check which.
| Company | Share price | Earnings per share | P/E |
|---|---|---|---|
| Steady Co. | $60 | $4.00 | 15 |
| Rapid Co. | $90 | $2.00 | 45 |
Investors pay $45 for each dollar of Rapid's profit and $15 for Steady's. That isn't automatically a mistake: they may expect Rapid's profits to grow much faster. The P/E shows what the price assumes, not whether the assumption is right.
Reading it
- High P/E: the market expects strong growth, or the stock is expensive, or this year's earnings are unusually low.
- Low P/E: the market expects slow growth or trouble, or the stock is cheap, or this year's earnings are unusually high.
- Flipped over, earnings divided by price is the Earnings yield. Earnings per share divided by the share price: the P/E ratio turned upside down. Glossary: a P/E of 15 is an earnings yield of about 6.7%.
Learn it properly
- Earnings Multiples: P/E and PEGPart 4: Research and Valuation · Free
- Value, Growth, Quality, and GARPPart 6: Strategy, Behavior, Accounts, and Taxes