Valuation

P/E ratio

Price to earnings

How many years of current profit you are paying for the shares.

A P/E of 20 means you pay £20 for every £1 of annual profit. It is not a measure of cheapness. It is a statement about what the market expects to happen to those earnings next.

A low P/E can mean a bargain, or it can mean the market has correctly worked out that earnings are about to collapse. A high P/E can mean a bubble, or it can mean the company is about to grow into it. The number alone cannot tell you which.

For cyclical businesses the signal inverts: the P/E looks lowest at the top of the cycle, when profits are at a peak that cannot last.

The formula

P/E = Share price ÷ Earnings per share

Figure

The order matters more than the maths

Do I understand how it makes money?1st

Does it actually make money?2nd

Will it survive a bad year?3rd

Is it cheap?last

Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.

Why it matters

It is the most common shorthand for valuation, and the most commonly misused.

The mistake everyone makes

Comparing P/Es across different industries, or treating a low P/E as automatically attractive.

Related terms

PEG ratio

The P/E adjusted for how fast earnings are growing.

Forward P/E

The P/E using next year's forecast earnings instead of last year's actual ones.

EPS

Net profit divided by the number of shares, which is your slice of it.

EV/EBITDA

Enterprise value against operating earnings. The takeover world's favourite multiple.

See P/E ratio on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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