Glossary

Price-to-earnings ratio

The P/E ratio divides a company’s share price by its earnings per share. It is the most-quoted shorthand for how expensive a stock is relative to its profits.

The price-to-earnings (P/E) ratio is share price divided by earnings per share (EPS) over a trailing twelve-month or forward period. A P/E of 25 means the market is paying $25 for every $1 of annual earnings.

It is a relative measure, not a verdict. A high P/E can reflect fast expected growth, and a low P/E can reflect real risk. Comparing a company’s P/E to its own history and to sector peers is more informative than the raw number.

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