BUSINESS SPEAK · P/E
P/E: Price-to-earnings ratio
How many years of profit the share price represents.
What it means
P/E is share price ÷ yearly earnings per share. A P/E of 20 means buyers pay 20 for every 1 of yearly profit. Turned around, profit × a typical P/E gives a rough value for a business.
Where you’ll meet it
- High P/E often means people expect fast growth; low P/E can mean a bargain or a problem.
- The ratio means nothing when earnings are zero or negative.
Worked example
Scenario: A share trades at 100 and the company earned 5 per share last year.
- P/E = 100 ÷ 5 = 20
- Earnings yield = 5 ÷ 100 = 5%
Answer: P/E is 20 — you pay 20 years of today’s profit.