Price-earnings ratio
The price-earnings ratio (P/E) divides the current share price by earnings per share, showing how many times current earnings investors will pay for a share. A high P/E reflects expectations of strong future growth or low perceived risk.
FrameworkRelative valuation
See it move
A company's shares trade at €36 and last year's earnings per share were €2.40, giving a price-earnings ratio of 15: share price divided by EPS. Investors are paying €15 for every €1 of current annual earnings. A P/E of 25 at a peer looks expensive by comparison, reflecting higher growth expectations, lower perceived risk, or both, rather than a fixed rule about value.
The formula
Variables
- Price-earnings ratio: how many euros investors pay per euro of current annual earnings (also called the earnings multiple)
- Current market price per ordinary share
- Earnings per share: net profit attributable to ordinary shareholders ÷ weighted average ordinary shares in issue
The forward P/E replaces trailing EPS with next year's forecast EPS and is more informative for valuation purposes. Applying a peer-group P/E to a company's EPS gives an estimated fair value per share.
Check yourself
Vantage SA's shares trade at €45. The company reported earnings per share of €3.00 for the year just ended, and analysts forecast EPS of €3.75 for the coming year. What are the trailing and forward P/E ratios respectively?