How to Calculate the Price-to-Earnings (P/E) Ratio
The price-to-earnings ratio equals the share price divided by earnings per share, so it shows what investors pay for each dollar of annual earnings.
The P/E Ratio formula
Calculator
Enter the share price, earnings per share and an industry average to get the P/E multiple and how it compares.
The market price of one share right now.
Net income divided by shares outstanding, normally over the last twelve months.
The benchmark multiple you want to judge this stock against.
Investors pay $15 for every dollar of annual earnings, which is why the answer is a multiple and not a price.
- Earnings yield
- 6.67%
- Implied price at the industry P/E
- $72
- Premium or discount to the industry
- −16.67%
- Verdict
- Trades below the industry average
Turning the ratio upside down gives 6.67%, the earnings the company generates per dollar of share price.
The same earnings priced at the benchmark multiple would put the share at $72.
This stock carries a multiple 16.67% below the benchmark, which is the comparison that gives the ratio its meaning.
A cheaper multiple can mean a bargain or a market expecting earnings to fall, so the number opens the question rather than settling it.
How to calculate P/E Ratio, step by step
- 1Take the share price. The current market price of a single share.
- 2Find earnings per share. Net income divided by shares outstanding, normally measured over the last twelve months of reported results.
- 3Divide. P/E ratio = share price ÷ EPS. The answer is a multiple rather than a dollar amount, so write it as a plain number.
- 4Flip it for the earnings yield. EPS ÷ price, written as a percent, which puts the stock on the same footing as a bond yield.
- 5Compare it with a benchmark. Set the multiple against the same industry or the company's own history, since the number says little on its own.
Worked example: P/E Ratio
A share trades at $60 and the company earned $4 per share over the past year. P/E = 60 ÷ 4 = 15, so investors pay $15 for every $1 of annual earnings. The earnings yield is the reciprocal: (4 ÷ 60) × 100 = 6.67%. If the industry average multiple is 18, the same $4 of earnings would price the share at 4 × 18 = $72, so at a P/E of 15 the stock trades 16.67% below the industry multiple.
P/E Ratio questions
What is a good P/E ratio?
There is no single number. The multiple only means something next to a benchmark, whether that is the industry, the wider market, or the company's own history, because firms expected to grow faster normally carry higher multiples. A low multiple can signal a bargain or a market that expects earnings to fall.
What does a negative or missing P/E mean?
The company lost money over the period, so the ratio has no useful reading and is usually left blank. Analysts fall back on sales or cash-flow multiples when earnings are negative.
What is the difference between trailing and forward P/E?
Trailing P/E divides the price by earnings already reported over the last twelve months. Forward P/E uses forecast earnings instead, so it comes out lower when earnings are expected to grow, and it is only as reliable as the forecast behind it.
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