Glossary: PE ratio

Also known as the “multiple”, the PE ration used in investment analysis and is the most common valuation measure of a company’s shares; directly relating the price of the share to the proportion of the company’s profits that belong to the owner of that share. It also tells the investor how long it would take to make back their initial investment in the company if it keeps generating the same earnings that it did in the past year, so if the P/E is seven, it will take seven years. The P/E is calculated by taking a company’s net profit and dividing it by the number of shares in issue, giving earnings per share (EPS). The P/E ratio is then calculated by dividing the share’s market price by the EPS. The P/E only works if it is used to compare comparable companies (oil companies, supermarkets, banks, etc) and a company with a low P/E represents better value to a potential investor than one with a high P/E.

Relevant to: Stocks & shares

More about