Valuation
What a P/E ratio can tell you
P/E ratio: the definition
The price-to-earnings ratio compares a share's price with annual earnings per share. Both figures must use the same currency units.
What it means
A trailing P/E uses past earnings; a forward P/E uses estimated future earnings. Comparing the two without checking the basis can mislead. A low ratio can reflect modest growth expectations or risks to profits. It does not establish that a share is a bargain.
ILLUSTRATIVE EXAMPLE
A share priced at 200p with annual earnings per share of 20p has a P/E of 10. If the earnings figure falls to 10p while the share price stays at 200p, the P/E becomes 20.
What to check
- Are the earnings historical or forecast?
- Are they statutory or adjusted, and for which year?
- Could unusual gains or losses distort the comparison?
Always ask which earnings figure sits underneath the ratio.
Sources and review date
Reviewed by Edravo on 6 September 2026.
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