Definition
The price-to-earnings ratio compares a stock's share price with the company's earnings per share. It shows how many units of currency the market currently pays for one unit of annual earnings.
How it works
A trailing P/E uses earnings from the past twelve months; a forward P/E uses estimates, which are uncertain. A higher P/E generally reflects expectations of faster growth or lower risk, while a lower P/E may reflect slower growth, higher risk or temporarily high profits.
P/E works best for comparing similar companies with positive, stable earnings. When earnings are negative the ratio has no useful meaning, and when they are close to zero it becomes extremely large, so data providers usually show it as not meaningful.
Formula / convention
P/E = Share price ÷ Earnings per share (EPS)
Illustrative example
Illustration with fictional figures: Company A trades at HK$30.00 with trailing EPS of HK$2.00, so its P/E is 30 ÷ 2 = 15 times. Company B trades at HK$10.00 with EPS of −HK$0.50; the division gives −20, but a negative P/E cannot be interpreted, so it is shown as not meaningful and should not be ranked as a cheap stock.
What to watch for
A low P/E does not mean a stock is cheap and a high P/E does not mean it is expensive, because earnings can be cyclical, inflated by one-offs or about to fall. P/E values based on negative or near-zero earnings are unreliable.