P/E ratio (price-to-earnings ratio)
The P/E ratio is a stock's price divided by its earnings per share, and it shows how many times the annual earnings the market is paying for that company.
The P/E ratio (price-to-earnings ratio) is calculated by dividing a stock's current price by the company's earnings per share (EPS). A P/E of 15, for example, means the market is paying 15 times the current annual earnings for that stock; put another way, if earnings stayed constant, it would take 15 years of earnings to "recover" the price paid.
P/E is mostly used to compare the valuation of similar companies (same sector, similar business model): a lower P/E can indicate a stock is cheaper relative to its earnings, but it can also reflect that the market expects lower growth or more risk for that company. A low P/E isn't automatically a buy signal, just as a high P/E isn't automatically a sign the stock is expensive: it depends on the sector, expected growth, and why that P/E differs from its peers.
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Frequently asked questions
How is the P/E ratio calculated?
By dividing the stock's current price by the company's earnings per share (EPS) over the last twelve months (or the estimated figure, depending on the variant used).
Does a low P/E mean a stock is cheap?
Not necessarily: it can reflect that the market expects lower future growth or more risk for that company. It should be compared with similar companies in the same sector, not in isolation.
How does P/E relate to ROE or EBITDA?
They're complementary indicators: P/E is about valuation (how much the market pays for earnings), while ROE measures return on equity and EBITDA measures operating profitability. They're usually analyzed together, not separately.