P/E ratio definition

Can help you compare a company’s current stock price to its current earnings – helping you to decide whether the stock is currently over or undervalued.

Home Investing glossary P/E ratio

What is the P/E ratio?

The P/E ratio compares a company’s share price to its earnings per share (EPS) – it’s a quick way to see how ‘expensive’ a stock is relative to the profit it generates.

 

How to calculate P/E ratio?

P/E ratio = share price ÷ earnings per share (EPS)

So, if a share costs £50 and the company’s EPS is £2, its P/E ratio is 25.

  • High P/E: investors are paying more for each pound of earnings, often because they expect strong growth in the future.
  • Low P/E: the stock might be undervalued or the company could be facing challenges.

It’s a handy starting point, but it’s best used alongside other measures – like revenue growth, dividend yield, and debt levels – to get the full picture of whether a share is good value.

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