MoneyWeek videos masthead

A beginner’s guide to p/e ratios

MoneyWeek deputy editor Tim Bennett explains one of the most widely used ratios you’ll see in the financial media – the price/earnings, or p/e ratio. What it measures, how you calculate it, and what it’s used for.

• See also: What is ‘earnings per share’?

• See all MoneyWeek videos here.

• To download the videos to your mobile device via iTunes, click here.

• Get all of our latest video tutorials sent straight to your inbox every week - sign up FREE to MoneyWeek Videos here.

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.

• Entry from MoneyWeek’s Financial glossary.

Video tutorial - why profit margins matter

Why profit margins are really useful

In this video, Ed Bowsher explains how to calculate a company’s profit margin, why it is the best way to evaluate profitability, and how you can use it when analysing a company.

Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.
MoneyWeek videos masthead

MoneyWeek Videos is our free weekly video email which breaks down the complicated world of finance and helps you understand what's really going on. Every week, MoneyWeek's Ed Bowsher takes a key piece of financial news or jargon and explains it. To join MoneyWeek Videos for free, just enter your email address.

To sign-up enter your email address.



A note about our free emails, advertising, and how to unsubscribe.

Because these emails are completely free, we do have to fund them with advertising. Occasionally we will send you separate promotional emails, which will contain advertisements from us or from other companies. By signing up to our free emails, you are consenting to receive these promotions. However we will never give, sell or rent your email address to any other companies. And if you want to stop receiving our free emails at any time, you can immediately unsubscribe by clicking on the link at the top of each email, or by calling us on 0207 633 3780. For more information, please see our Privacy policy.

One Response

  1. 18/09/2014, dfl3tch3r wrote

    This is where traders can help educate investors….For instance investing would seem to most, less riskier than trading. I would say not so! A trader knows exactly what his risk amount is to the nearest penny by the use of a stop loss. Because of this he can use leverage in order to run profits and avoid chasing losers. A technical trader does not care which company he trades so he’s not emotional about the stock to begin with. A trader usually has a ‘system’ so he avoids Recency Bias. A trader isn’t looking for the cheapest price or ‘bargain’ stock; if he’s a technical trader he’s simply interested in the pattern, and so forgets the cheapest price and waits for a trend change instead. Not always but more often a trader is least affected by emotions. Apply this to investing and you’ll do well.

Comment on this article