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What Is The Price-Earnings Ratio (P/E)?

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The price-earnings ratio (P/E) is a share valuation metric commonly quoted in the financial media. The formula to calculate the P/E ratio is the company’s share price divided by its earnings (or profit) per share.

For example, if a company’s share price is $10 and its earnings per share last year was $1, its P/E ratio is ($10/$1) 10 times (sometimes shown as 10x). Given that the formula uses last financial year’s earnings per share, this is sometimes called a trailing P/E ratio.

What is a ‘forward’ P/E ratio?

Sometimes, the P/E ratio is calculated using analyst forecasts for the next financial year’s earnings per share.

For example, if a company’s share price today is $10 and its forecast earnings per share is $1.50, the P/E ratio is ($10/$1.50) 6.6x.

Where can I find a company’s earnings per share (EPS)?

Investors can find a company’s earnings per share in its half-yearly or annual financial reports, at the bottom of the ‘Income Statement‘.

P/E ratio chart

What does the P/E tell us?

The P/E ratio gives investors an indication of how expensive a company’s shares are relative to its yearly profits. A lower P/E is often perceived as being ‘cheaper’.

However, it’s important to remember that share prices often take into consideration the future expectations of the company, whereas the P/E ratio is taken at a point in time, kind of like a photograph.

A company’s P/E ratio can also be compared to its peers. Once again, a lower P/E is seen as a positive. However, two public companies are rarely the same.

Finally, a very low price-earnings ratio can be a cause for concern. This may suggest the company is higher risk or expected to face financial difficulty.

Owen Raszkiewicz

Owen Raszkiewicz

Owen is the Founder of Rask, Lead Investment Analyst for Rask Invest and head educator at Rask Education. Prior to founding Rask, Owen was an investment analyst at the highly regarded managed funds research business Zenith Investment Partners and a Writer/Analyst for The Motley Fool Australia. Owen’s formal qualifications include a Master of Applied Finance and Master of Financial Planning from Kaplan Professional, Bachelor of Technology (Information Systems) from Swinburne University of Technology, Advanced Diploma of Financial Services (Financial Planning) and Diploma of Mortgage Broking Management. He's also completed level 1 of the Chartered Financial Analyst (CFA) program.

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