Price-to-Earnings Ratio
Also known as: P/E, PE Ratio, Earnings Multiple
The price-to-earnings (P/E) ratio divides a company’s share price by its earnings per share, showing how much investors pay for each dollar of net profit.
The price-to-earnings ratio, or P/E, is the best known valuation multiple. It divides the share price by earnings per share, telling you how many dollars investors are willing to pay today for one dollar of the company’s annual profit.
Trailing vs forward
A trailing P/E uses the last twelve months of reported earnings. A forward P/E uses analyst estimates for the year ahead. Forward multiples matter most to investors because price reflects expectations about the future.
Reading it well
A high P/E is not automatically expensive, and a low one is not automatically cheap. It reflects expected growth, risk, and the quality of earnings. P/E is most useful when compared against a company’s own history and against a fair set of peers.