Price/earnings (P/E ratio)
What is the price/earnings (P/E) ratio?
The price/earnings (P/E) ratio describes the ratio of a share price to the company's earnings per share (EPS). Usually the price per share will be greater than the earnings per share, thus the P/E ratio is often called the 'multiple'.
Where have you heard about the price/earnings (P/E) ratio?
As an investor, you would find it difficult to avoid. The P/E ratio is fundamental to equity investment and a key tool for the valuation of shares. Investment guides, financial media and your financial adviser will all refer to it.
What you need to know about the price/earnings (P/E) ratio.
The P/E ratio expresses the share price in relation to the company's earnings per share (EPS). Usually, the price will be greater than the EPS, thus the P/E ratio tells the investor how much they are having to pay to 'buy' that company's earnings. For example, a company's shares are trading at £5 and its EPS is £1, thus the P/E ratio is five. The higher the P/E ratio, the more confidence the market has in the company's prospects - in effect, investors are betting on the appearance of a higher EPS in the future.
Find out more about the price/earnings ratio.
The P/E ratio is one measure of a company's investment potential. Another is the level of dividends per share. Learn about dividends here.