Investing term
What is Price-to-earnings (P/E) ratio?
How many dollars you pay per dollar of annual earnings — written as 'NN×'.
The price-to-earnings (P/E) ratio is how many dollars you pay for each dollar of a company's annual earnings, written as a multiple like '20×'. It's calculated as the share price divided by earnings per share, and it's the most common valuation shorthand in investing.
A high P/E implies the market expects strong future growth — investors are willing to pay more per dollar of current earnings because they expect those earnings to rise. A low P/E implies modest expectations, or a business the market is wary of. But P/E can't be read in isolation: it varies hugely by industry, is meaningless for companies with no or negative earnings, and can be distorted by one-off items or the cyclicality of profits. A P/E is a starting point for a valuation conversation, not an answer — the crucial questions are whether the earnings are sustainable and whether the growth implied by the multiple is realistic.
The P/E ratio is price ÷ earnings per share — how much you pay for each dollar of annual profit, written as a multiple. A '20×' is cheap for a fast grower, dear for a declining business.
For example
A stock trading at $100 with earnings of $5 a share has a P/E of 20× — you're paying $20 for each $1 of annual earnings, a multiple that only makes sense in the context of the company's growth and quality.
Learn it by doing
That's Price-to-earnings (P/E) ratio in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
The P/E ratio matters because it's the universal valuation shorthand — the first number most investors reach for to gauge whether a stock is expensive or cheap. But its simplicity is also its danger: a P/E means little without context, since a '20×' can be cheap for a fast grower and expensive for a declining business. Understanding what a P/E implies about growth expectations, and its many caveats, is what turns it from a misleading soundbite into a useful starting point.
⚠ Judging cheap or expensive by P/E alone
A low P/E isn't automatically cheap, nor a high one expensive — it depends on growth, quality, and sustainability. A low P/E can signal a business in decline (a value trap), while a high P/E can be justified by rapid growth. Comparing P/Es across different industries, or judging a stock on its P/E without asking whether the earnings are sustainable, leads to poor conclusions.