P/E ratio price-to-earnings
The P/E ratio shows how many times annual earnings per share the market is paying for a stock. A P/E of 20 means you pay 20 years of current earnings. It is useful for comparing companies in the same sector and against their own history, but it stops meaning anything when the company is loss-making, and a low P/E usually signals a problem rather than a bargain.
How it is calculated
| Price per share | €50 | |
|---|---|---|
| ÷ earnings per share (EPS) | €2.50 | |
| P/E | 20 times | |
| Earnings yield, 1 ÷ 20 | 5 % |
P/E = price per share ÷ earnings per share. A stock at €50 with EPS of €2.50 trades on a P/E of 20 times. Read forwards: you pay €20 for every euro of annual profit. Turned around it is more useful still: the inverse, 1 ÷ 20 = 5 %, is the earnings yield, and that one can be compared with what a bond pays. The same stock has several P/Es at once depending on which earnings go underneath: the last twelve months (TTM), the last closed financial year, or what analysts estimate for the next one. They are not interchangeable and it is worth saying which one you are using.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is not
It does not tell you whether a share is cheap or expensive. A P/E of 8 can be a bargain or a company whose profits are about to collapse, and one of 40 can be expensive or a company growing at 30 % a year. Without comparing against its sector, its own history and its growth, the number alone concludes nothing. And with negative earnings it means nothing at all: it is usually left blank, because a negative P/E cannot be interpreted.
See the full glossary · What the Celsmar financial terminal is
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.