What is the P/E (price-to-earnings) ratio?
Short answer
The P/E ratio divides a company’s share price by its earnings per share. It shows how much investors pay for each unit of annual profit, and is used to compare valuation across companies and time.
The formula
Divide the current share price by earnings per share (EPS), which is net profit attributable to shareholders divided by shares outstanding. Equivalently, divide the market capitalisation by total net income.
Worked example (illustrative): a share priced at 100 whose company earned 5 per share over the last year has a P/E of 100 / 5 = 20. Investors are paying 20 units for each unit of annual earnings.
P/E = share price / earnings per share (EPS)Trailing and forward
A trailing P/E uses earnings from the last twelve months and is based on reported results. A forward P/E uses analysts’ estimates for the next twelve months, so it depends on forecasts that can be wrong. Always check which one a source is quoting.
How to read it, and its limits
A higher P/E can mean investors expect profits to grow, or that the shares are expensive; a lower one can mean slower expected growth, higher perceived risk, or temporarily depressed earnings. Norms differ by industry and country, so compare like with like. The ratio is not meaningful when earnings are zero or negative.
P/E ignores debt, one-off gains or losses, and accounting differences between companies. Analysts use it alongside other measures such as price-to-book, enterprise value ratios and cash flow. It describes valuation; it is not advice to buy or sell.