The price-to-earnings (P/E) ratio is the most famous valuation metric. It answers: how much are investors paying for each pound of the company's earnings?

How it's computed

P/E = Share price ÷ annual earnings per share (EPS). A stock at 20 with EPS of 2 has a P/E of 10.

High or low?

  • Low P/E: possibly cheap — or the market expects earnings to slow.
  • High P/E: possibly expensive — or the market expects strong growth.

Compare within a sector

Compare a bank's P/E to another bank, not to a real-estate firm — and to the stock's own history.

Caution

P/E alone isn't enough; a loss-making company has none, and one-off earnings distort it. Use it with growth, dividends and debt.