What is the price earnings ratio (P/E)?

Price earnings ratio (P/E): The share price divided by earnings per share. A high P/E means the market pays a lot for each euro of profit, often because growth is expected.

The P/E shows how many euros the market pays for each euro of a company's profit. You divide the share price by the earnings per share. A P/E of 20 means you pay 20 euros for 1 euro of yearly profit.

A high P/E often means investors expect a lot of growth. A low P/E can mean a share is cheap, but it can also mean there are worries about the future.

The P/E is most useful for comparing companies in the same sector. What counts as a normal P/E differs a lot between sectors.

Example
A share costs 60 euros and earnings per share are 3 euros. The P/E is 60 divided by 3, which is 20. Another company also trades at 60 euros but earns 6 euros per share. Its P/E is 10.

Watch out
If a company makes a loss, the P/E tells you nothing. A low P/E is also no proof that a share is a bargain.

Read more in the guide The P/E ratio: how many years of profit you pay for a share.

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