P/E Ratio
A company’s share price divided by its earnings per share.
Also called: price to earnings · price earnings ratio · pe
In plain language
The P/E ratio expresses how many dollars investors pay for each dollar of annual earnings. A P/E of 25 means $25 of price per $1 of earnings.
Trailing P/E uses the last twelve months of reported earnings; forward P/E uses analyst estimates, which are forecasts and are often wrong.
A high P/E is not automatically expensive and a low one is not automatically cheap. Fast-growing companies routinely carry high multiples, and low multiples often reflect real problems.
The formula
P/E Ratio
Share Price ÷ Earnings Per Share
Why it matters
P/E is context, not a signal. It tells you what expectations are priced in, which helps explain why a stock can fall on good news.
Common mistakes
- Comparing P/E ratios across industries with completely different growth profiles.
- Using P/E on companies with negative or barely positive earnings, where it is meaningless.
- Treating a low P/E as a trade signal on its own.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
A company’s net profit divided by its number of outstanding shares.
A company’s scheduled quarterly disclosure of financial results.
The total market value of a company’s shares — share price times shares outstanding.
A unit of ownership in a company.
A cash payment distributed to shareholders out of company profits.