DEFINITION of 'Price-Earnings Ratio - P/E Ratio'
A valuation ratio of a company's current share price compared to its per-share earnings.
Market Value per Share / Earnings per Share (EPS)
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiple."
INVESTOPEDIA EXPLAINS 'Price-Earnings Ratio - P/E Ratio'
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.
It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.
Things to Remember
- Generally a high P/E ratio means that investors are anticipating higher growth in the future.
- The average market P/E ratio is 20-25 times earnings.
- The P/E ratio can use estimated earnings to get the forward looking P/E ratio.
- Companies that are losing money do not have a P/E ratio.
For more on P/E ratios, check out How can the P/E ratio mislead investors?
The portion of a company's profit allocated to each outstanding ...
The ratio of a stock’s price to its cash flow per share. The ...
A valuation measure, generally applied to broad equity indices, ...
The academic study of historical chart patterns and trends of ...
The total dollar market value of all of a company's outstanding ...
The price-to-earnings (P/E) ratio is the valuation ratio of a ...
InvestingRatio analysis is the use of quantitative analysis of financial information in a company’s financial statements. The analysis is done by comparing line items in a company’s financial ...
InvestingThe debt ratio divides a company’s total debt by its total assets to tell us how highly leveraged a company is—in other words, how much of its assets are financed by debt. The debt component ...
InvestingFind out more on how this liquidity ratio is used to measure a company's ability to pay short-term obligations.
InvestingBook value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand, market value is the current price at which you can sell an asset. ...
Fundamental AnalysisIf you don't know how to evaluate a company's present performance and its possible future performance, you need to learn how to analyze ratios.
InvestingLearn more about how this ratio is used to determine a stock's value based on its earnings growth.
Fundamental AnalysisHow is a company being run? Is it generating profits? The answer to these questions lies in analyzing the profitability ratios of a company.
MarketsA look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
Investing BasicsFind out how to calculate this common valuation ratio and what the results can tell you about a company's performance.
Investing BasicsA low P/E ratio doesn't automatically mean a stock is undervalued, just like a high P/E ratio doesn't necessarily mean it is overvalued.