Price to Earnings Ratio

How to read it

The price to earnings ratio divides the stock price by basic earnings per share for the trailing twelve months. The numerator moves every trading day with the share price. The denominator changes when a new quarter’s earnings replace an old one, and it moves with anything that affects profit or the share count, including one-off gains and charges. A higher value means investors pay more for each dollar of recent earnings, often because they expect profits to grow.

What is typical

What counts as high or low depends on how fast and how reliably a business grows. Fast-growing companies in software and other expanding fields usually trade at higher multiples, while banks, energy producers and other cyclical or slow-growing businesses tend to trade at lower ones. Compare a company with the median for the company’s sector rather than the market as a whole.

Pitfalls

stockrow shows the ratio as zero when the result is negative, so a company with losses reads as zero rather than as cheap. It is worked out for every trading day, from the latest reported figures on or before that day, so a jump can come from a new earnings report rather than the price. Quarterly and annual values are the daily value on the first trading day on or after each period end. Earnings near zero make the ratio extremely large.