Price/earnings (P/e) ratio

The price/earnings ratio is a quick way to establish a firm’s relative value. You get it by either dividing a firm’s market capitalisation by its profits after tax, or by dividing the price of one share by the firm’s earnings per share.

The p/e tells you how many years it will take the firm to make profits equivalent to its market cap: if the p/e is ten, assuming profits stay the same, it will take ten years.

A high p/e, or ‘multiple’, suggests a firm that is growing or is expected to grow fast. A high-growth firm with a low p/e could be considered cheap, and a low-growth firm with a high p/e could be considered expensive.

The p/e is the main measure analysts use to determine a company’s position relative to the rest of the market.

• See Tim Bennett’s video tutorial: A beginner’s guide to p/e ratios.

MoneyWeek magazine

Latest issue:

Magazine cover
What George didn't tell you

The hidden flaws in Britain's economy

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


27 March 1963: Beeching recommends cuts to Britain's railways

On this day in 1963, Dr Richard Beeching produced his infamous report that saw many railway lines closed in favour of bus services.