P/E Ratio

From Reuters Financial Glossary

Synonym: PER

The P/E Ratio (PER) is the latest closing share price divided by the net profit per share (Eps). Note: P/E ratios are only really valuable when comparing the latest price with expected or forecast earnings, rather than last year's earnings, because an investor who bought the stock today could not buy last year's earnings. If a company has forecast EPS of 10 and a share price of 150, its P/E is 15. In other words, it would take fifteen years for the stock investment to pay for itself. The P/E Ratio is also known as the P/E multiple. The reverse of the P/E ratio is the 'earnings yield', or 1/PER. A company with a P/E of 15 has an earnings yield of 6.66 percent (1 divided by 15). Price-earnings is one of the most common measures of investment value and is widely used by the media and markets as an indicator of whether a stock is expensive or cheap. The higher the PER, the higher the market values the company's expected earnings flow. A high PER may be a sign that the market expects the company's earnings to grow rapidly, or it may be a sign that earnings have slumped and the share price does not yet fully reflect that fall. A relatively low P/E suggests investors' outlook for the company is gloomy. As P/E ratios are a measure of relative value, not absolute, they cannot be considered in isolation: one company should be compared against its rivals, or industry or national averages. Low-growth companies such as steel makers, shipyards and construction companies often trade at relatively low P/Es (10 or less) while high-tech firms often command P/E multiples of 40 or more.

See also: Ratio