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price-to-earnings (P/E) ratio

accounting

Also known as: P/E ratio

Written byDoug Ashburn

Fact-checked byThe Editors of Encyclopaedia Britannica

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Know your financial ratios.

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Also Known As:: P/E ratio

The price-to-earnings ratio (P/E) is a valuation measure that compares a company’s share price with its earnings per share (EPS). It is one of the most widely used ways to judge whether a stock looks expensive or cheap relative to its profits.

P/E="price" per share ÷ earnings per share

Suppose a stock trades at $100 and the company reports $5 in earnings per share. That would give it a P/E ratio of (100 ÷ 5) = 20. That means investors are paying $20 for every dollar of current earnings. Put another way, if earnings stayed constant, it would take 20 years to “earn back” the price you paid.

Trailing vs. forward P/E

Professionals, like stock analysts and institutional investors, track two separate P/E ratios: one that looks back and one that looks ahead.

Part of a bigger picture

The price-to-earnings (P/E) ratio is just one of the many fundamental indicators that analysts and investors use to gauge value. Learn how the P/E, P/B, PEG, and others compare in Britannica Money’s guide to financial ratios.

Trailing P/E (or TTM for trailing twelve months) is based on a company’s reported earnings over the past year. These numbers come straight from the audited financial statements that publicly traded companies are required to report. But if earnings are volatile—or have been trending up or down—last year’s profits may not reflect today’s conditions.
Forward P/E uses projected earnings, often based on analyst estimates or company guidance for the next fiscal year. It captures what the market expects, but it rests on assumptions that can shift with new information.

Both versions matter. Trailing P/E is based on verifiable results—using the same set of generally accepted accounting principles (GAAP) that all publicly held companies use—while forward P/E reflects future expectations. Together, they frame the tension between what a company has delivered and what the market believes it can deliver next.

Why the P/E ratio is important

The P/E ratio is one of the most widely cited measures in stock analysis. A high P/E often signals optimism about a company’s growth, while a low P/E may suggest undervaluation—or deeper problems that have depressed the current share price, but are not yet reflected in recent earnings numbers.

Investors sometimes think of the ratio as a “payback period”—the number of years it would take, at the current earnings rate, to earn back the price paid for the stock. But markets rarely move in straight lines. Trailing P/E is rooted in audited results, while forward P/E reflects expectations. The two together show how investors balance proven performance with future potential.

This article was most recently revised and updated by Doug Ashburn