P/E Ratio (Price-to-Earnings)
Shows how much investors are paying for each unit of a company's earnings.
Formula
P/E Ratio = Share Price / Earnings Per Share (EPS)
Worked exampleA share price of $120 and EPS of $6 produces a P/E ratio of 20x.
Calculation steps
- Use the current share price: $120.
- Find EPS for the same earnings period: $6.
- Divide $120 by $6 to get 20x.
How to interpret it
A higher P/E often reflects stronger growth expectations, while a lower P/E can signal slower growth, risk, or possible undervaluation.
Industry context
Compare P/E with companies in the same industry. Banks, utilities, software firms, and cyclical producers commonly trade at very different ranges.
Common mistakes
- Do not use P/E when earnings are negative.
- Do not compare trailing P/E with forward P/E without labeling the periods.
- Check whether one-time gains temporarily inflated EPS.