Price/earnings ratio: what a P/E actually tells an investor

The formula

P/E equals share price divided by earnings per share. A P/E of 15 means the market is paying 15 times one year of current earnings for the share.

Trailing versus forward

Trailing P/E uses the last reported EPS and is factual. Forward P/E uses a forecast and is an opinion. Compare like with like; mixing the two across companies is the most common error in valuation discussions.

A low P/E is not a bargain

A low multiple often means the market expects earnings to fall. Before treating it as value, check whether earnings are cyclical, whether a one-off gain inflated the denominator, and whether debt is high enough that equity carries most of the risk.

When P/E does not work

• Negative or near-zero earnings make the ratio meaningless.
• Early-stage companies reinvesting everything will always look expensive.
• Asset-heavy or cash-rich businesses are better read with EV/EBITDA or price-to-book.

Sanity checks before you compare

1. Are both EPS figures diluted, or both basic?
2. Has either company restated shares after a split or bonus issue?
3. Is the earnings period the same length and the same year end?
4. Is the share price the one at the reporting date, or today?

Recording the inputs honestly

A P/E ratio needs two facts a ledger does not contain: a share price and a share count. NanoFora takes both from the Share data screen, combines them with the net profit posted in the ledger, and shows the price and EPS used. If earnings are zero or negative, the ratio is reported as not meaningful instead of being printed as a number. See earnings per share and dividend yield and payout.