P/E Ratio (Price-to-Earnings)
Learn how to calculate and interpret P/E Ratio (Price-to-Earnings) with its formula, a worked example, industry context and common mistakes.
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.
Accounting and market variations
Definitions, reporting choices, periods, capital structures, and market conventions can change how this metric should be compared.
- 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.