price-earnings ratio

Fin

a company’s share price divided by earnings per share (EPS).

EXAMPLE

While EPS is an actual amount of money, usually expressed in cents per share, the P/E ratio has no units, it is just a number. Thus if a quoted company has a share price of $100 and EPS of $12 for the last published year, then it has a historical P/E of 8.3. If analysts are forecasting for the next year EPS of, say, $14 then the forecast P/E is 7.1.

     The P/E ratio is predominantly useful in comparisons with other shares rather than in isolation. For example, if the average P/E in the market is 20, there will be many shares with P/Es well above and well below this, for a variety of reasons. Similarly, in a particular sector, the P/Es will frequently vary from the sector average, even though the constituent companies may all be engaged in similar businesses. The reason is that even two businesses doing the same thing will not always be doing it as profitably as each other. One may be far more efficient, as demonstrated by a history of rising EPS compared with the flat EPS picture of the other over a series of years, and the market might recognize this by awarding the more profitable share a higher P/E.