Glossary / Fundamentals
Price-to-earnings ratio (P/E)
Also called: P/E ratio · earnings multiple · PE
The price-to-earnings ratio is a company's share price divided by its earnings per share. It expresses how much is being paid per unit of reported annual earnings, and is the most widely quoted of the earnings multiples.
How it is measured
How is price-to-earnings ratio measured?
Divide the current share price by earnings per share. The trailing version uses the last four reported quarters, which are facts. The forward version uses an analyst estimate of the next four, which is a projection and moves as estimates are revised. A company with negative earnings has no meaningful ratio, so the measurement simply does not exist for it.
Why it matters
Why does price-to-earnings ratio matter to a swing trader?
The multiple is a compact way to compare what is being paid for reported earnings across companies in the same business. Its limits are the important part: it is not comparable across sectors, because durable differences in growth rate, capital intensity and accounting treatment mean the ordinary range in one industry is unusual in another. It also says nothing about debt, since it prices equity alone.
In Tapeline
Does Tapeline use price-to-earnings ratio?
Tapeline's company-finances check looks at company numbers like this one.
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General information about market vocabulary, written to be descriptive rather than prescriptive. Not investment advice — see the risk disclosure.