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Price-to-Earnings (P/E) Ratio Calculator

Market value of a share relative to its earnings.

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P/E Ratio

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Overview

The Price-to-Earnings (P/E) ratio is a valuation metric that compares a company's current share price to its per-share earnings. It serves as an indicator of whether a stock is overvalued or undervalued relative to its sector peers and historical performance.

Symbols

Variables

PE = P/E Ratio, MPS = Market Price / Share, EPS = Earnings / Share

PE
P/E Ratio
Variable
MPS
Market Price / Share
£
EPS
Earnings / Share
£

Apply it well

When To Use

When to use: The P/E ratio is best utilized when comparing companies within the same industry or against a company's own historical valuation. It is most reliable for profitable, mature companies where earnings are stable and positive.

Why it matters: This ratio indicates how much the market is willing to pay today for a stock based on its past or future earnings. A high P/E can signify high growth expectations, while a low P/E might suggest a value opportunity or underlying financial distress.

Avoid these traps

Common Mistakes

  • Relying solely on trailing P/E without considering future prospects or one-off profit spikes.
  • Convert units and scales before substituting, especially when the inputs mix £.
  • Interpret the answer with its unit and context; a percentage, rate, ratio, and physical quantity do not mean the same thing.

One free problem

Practice Problem

A technology firm has a current market share price of 150.00 and reported earnings per share of 6.00. Calculate the Price-to-Earnings ratio.

Market Price / Share150 £
Earnings / Share6 £

Solve for: PE

Hint: Divide the market price per share by the earnings per share.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Investopedia: Price-to-Earnings Ratio
  2. Wikipedia: Price-earnings ratio
  3. Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance. 13th ed. McGraw-Hill Education, 2020.
  4. Brealey, Myers, Allen: Principles of Corporate Finance
  5. Ross, Westerfield, and Jaffe Corporate Finance
  6. Brealey, Myers, and Allen Principles of Corporate Finance
  7. AQA A-level Business Specification (7131, 7132)