Valuation · updated October 21, 2026
What is P/E (price-to-earnings ratio) and how is it calculated
P/E tells you how many dollars you pay for each dollar of profit the company makes in a year. You get it by dividing the share price by earnings per share. A P/E of 20 means that, at today's profit, it would take the company 20 years to earn what it costs.
P/E formula
- Share price
- The latest price on the exchange.
- EPS
- Net profit over the last 12 months divided by the number of shares. We use reported profit, not the company's "adjusted" figure.
Worked example
A stock trades at $120 and the company earned $8 per share over the last 12 months.
You pay 15 times one year of profit. If profit rises to $10 and the price stays put, P/E drops to 12: the stock gets cheaper.
How to read P/E
The thresholds depend on the sector: banks usually have a low P/E, software companies a high one. Compare P/E with companies in the same sector and with the company's own history, not with any random stock.
When P/E can fool you
Negative profit: P/E means nothing and is not shown. One-off profit (selling a building): P/E looks low, but the profit will not come back. Cyclical companies (steel, oil): P/E is lowest right at the top of the cycle, when profit peaks.
Related terms
Questions about P/E
What is a good P/E for a stock?
There is no single good number. For large companies, a P/E between 15 and 25 is normal. What matters is how it compares with peers in the same sector and with profit growth: a P/E of 30 can be cheap for a company doubling its profit.
What is the difference between P/E and forward P/E?
P/E uses profit from the last 12 months, already reported. Forward P/E uses the profit analysts expect over the next 12 months.
Why do some stocks have no P/E?
Because they are losing money. With negative profit the ratio cannot be read, so we do not show it.
These explanations are for information only. They are not a recommendation to buy or sell.
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