Reading Financials5 min read
What is the P/E ratio?
Price-to-earnings is the most quoted valuation number. It tells you what you pay for each rupee of profit.
The price-to-earnings ratio, or P/E, is the single most quoted valuation metric. It answers a simple question: how much are you paying for each rupee of the company's annual profit?
The formula
P/E = share price divided by earnings per share (EPS). A P/E of 25 means investors are willing to pay 25 for every 1 of yearly profit.
High or low: it depends
A high P/E can mean a stock is expensive, or that investors expect fast growth. A low P/E can mean a bargain, or a business in trouble. The number only makes sense compared with the company's own history and its industry peers.
Frequently asked
- What is a 'good' P/E?
- There is no universal good P/E. Always compare against the industry P/E and the company's own track record.