The P/E ratio

The price-to-earnings ratio is a share price divided by earnings per share. If a share costs $100 and the company earned $5 per share last year, the P/E is 20.

One useful way to read it: at a P/E of 20, you are paying twenty dollars for each dollar of annual profit. If profits never changed and were all paid out to you, it would take twenty years to get your money back.

Three P/E ratios, one company

The denominator is contested, and the choice changes the answer dramatically.

Trailing versus forward

• Trailing P/E uses earnings already reported. It is factual but backward-looking, and for a fast-growing company it will look expensive even when it is not.
• Forward P/E uses estimated future earnings. It is more relevant and less reliable, because the estimate can be wrong. The S&P 500's forward 12-month P/E was 20.0 in early August 2026, against a ten-year average of 19.0.

Why a low P/E is not 'cheap'

This is the misunderstanding that costs beginners the most money.

A P/E ratio compares price to current earnings. If the market expects those earnings to fall, it will pay less for them — producing a low P/E. Cyclical businesses at the peak of their cycle routinely show their lowest P/E ratios at the moment they are most expensive in reality, because the earnings in the denominator are about to collapse.

When P/E does not work at all

• Companies with no earnings. The ratio is undefined.
• Companies with one-off gains or charges distorting the denominator.
• Banks and insurers, where price-to-book is often more informative.
• Any comparison across industries — a utility and a software company have structurally different multiples for structural reasons.