Super Glossary

Price-To-Earnings Ratio (P-E)

Business / Taxes / Price-To-Earnings Ratio (P-E): The price-to-earnings ratio (P-E) is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share. A stock's P-E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P-E of 30 is trading at a price 30 times higher than its earnings, while one with a P-E of 15 is trading at 15 times its earnings. If earnings falter, there is usually a sell-off, which drives the price down. But if the company is successful, the share price and the P-E can climb even higher. Similarly, a low P-E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Or, conversely, a clue that the market considers the company a poor investment risk. Stocks with higher P-Es are typical of companies that are expected to grow rapidly in value. They're often more volatile than stocks with lower P-Es because it can be more difficult for the company's earnings to satisfy investor expectations. The P-E can be calculated two ways. A trailing P-E, the figure reported in newspaper stock tables, uses earnings for the last four quarters. A forward P-E generally uses earnings for the past two quarters and an analyst's projection for the coming two.
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