P/E ratio
Price-to-earnings ratio
In short
#FinanceThe P/E ratio is the share price divided by earnings per share. It tells you how many years of current earnings you are paying for one share, at today's earnings level.
Why it matters
P/E is the fastest way to compare what the market expects from two companies, and the easiest to misread. A low P/E can mean a bargain or a business the market expects to shrink. Comparing P/E across industries is close to meaningless. Software and banking carry structurally different multiples.
Example
A share trades at $60 with earnings per share of $3. The P/E is 20, meaning buyers are paying twenty times current annual earnings, a bet that earnings will grow, or that this level is sustainable.
Frequently asked
What is a good P/E ratio?
There is no universal number. It only means something against the same company's history, its direct competitors, and its growth rate. A P/E of 30 can be cheap for a fast grower and expensive for a utility.
Trailing or forward P/E?
Trailing uses the last twelve months of reported earnings and is factual. Forward uses analyst estimates and is a projection. Forward P/E always looks lower when growth is expected, which is precisely why it is quoted more often.